UK Government Policies - Essay Example

? Government Policies Essay- Government Policies The United Kingdom’s government keeps a closecheck on the banking sector by monitoring and preventing actions that could lead to a collapse in the banking system. It takes necessary measures to prevent the interest of financial institutes and the customers related to these institutes for example when it helped in paying all of Royal Bank of Scotland’s liabilities when it was suffering from bankruptcy (Lybeck, 2011). In 2008, the government of the United Kingdom designed a set of new policies so that the banks could cope up with credit crunch (a shortage of funds in the credit market for businesses and consumers) and recover from the economic downturn (Donaldson, 2011). The reasons for the banking crisis were many including low real interest rates, too much liquidity and a misjudged faith in the financial system. These three factors created an entourage that was extremely optimistic and full of opposite opinions. By not understanding the sensitive situation, some banks have only themselves to blame (Singh, 2007). The tradition within the banking sector in the UK has been one of the risks taking type that lead to its ultimate failure. Bankers made a mess of the financial reading and hence the financial situation (Singh, 2007). However, this failure was not just restricted to individual banks but also the system constructed to defend the public from risk. Banks got concerned about the value of their mortgage and also about the mortgages they had purchased from other institutes. For this reason they refused to lend to other banks in the money markets (Singh, 2007) The measures that the governments stuck during the financial crisis were public investments like debt and equity which further resulted in acquiring banks and other institutions. Government investments eased the situation of banks that went bankrupt and failed to meet its obligations. It increased the amount of money or capital they had and able to make them go on with their daily business routine. The banks that did not keep up to their reputations were legally intervened by the government as it is a part of legal procedure. This intervention means taking away the license from the banks if they were under performing to the level that they had huge debts. This practice however is very common in the USA and some examples include the closing of Washington the sale to JPMorgan (Giudice, 2012). In some cases a few banks could not be sold and so the government decided to take over them by nationalization. For example in the UK the government nationalized many banks and took over some by buying through common stock. Common stock gave them the right to owner ship of some of the largest banks in the UK like Royal Bank of Scotland and Lloyds (Giudice, 2012). To recover from this financial crisis, the government of the United Kingdom came out with different schemes. One of the schemes was known as the recapitalization program. Under this scheme the government agreed to finance the largest banks in the UK by injecting ?50 billion worth of investment. A company called the UK Financials Investment Limited (UFIL) was created to manage investments in these large banks and to check if they were providing lending with reasonable rates of interest to the general public (Lybeck, 2011). The recapitalization program required an approval from Her Majesty’s treasury for banks to attain it. Eight banks and building societies subscribed to the program including RBS and Lloyds who were granted funds worth ?20 billion and ?17 billion respectively. The government also put some demands forward. It said that the banks, after receiving funds should try to help people with their mortgage payments so that they could stay in their homes. The government also kept the right to appoint new non-executive directors. The government recapitalized RBS and Lloyds and taking over 70% and 65% respectively. It took complete control over Northern Rock and Bradford & Bingley. The reason for this kind of investment by the government was to eradicate liquidity concerns so that the bank could confidently meet its obligations and payments systems (Giudice, 2012). Another scheme known as the credit guarantee scheme was limited for only those institutions that had subscribed to the recapitalization program. The government of UK was offering banks insurance on short and medium term basis. The scheme was made to promote lending between banks (Giudice, 2012). However the government opened this scheme only for a UK incorporated bank with an exception to an institution that had a very large business in the UK. The government also made it clear that the banks interested in the schemes must lay their plans before Her Majesty’s treasury if their credit guarantee scheme got accepted. The credit scheme was believed to cover losses worth ?250 billion. It is yet to be seen how much it actually has (Giudice, 2012). One other reform that the government is trying to enforce is the banking bill. The government has submitted the draft and will receive a reply from the Parliament in early 2013. The bill looks to find a permanent solution for banks that get into serious difficulties (Donaldson, 2011). It will protect the banks in the UK to perform everyday banking activities linked with savings and deposits from the hard to predict business environment. It will do this by developing a ring fence from deposits of people and companies (Donaldson, 2011). Another scheme to look after the needs of customers was introduced by the government. The financial services compensation scheme was introduced to compensate the customers if the bank went bankrupt and failed to pay back (International Monetary Fund, 2002). The financial services compensation was indented to pay individuals who had deposits in banks, applied for insurance and even small businesses. It was also created to give advice on home finance and mortgages to people either seeking for future investments or stuck with the present ones (Donaldson, 2011). The Bank of England acts on the policies that the government makes. It is fully owned by the British government. In 2008 the Bank of England came up with a scheme known as the liquidity scheme (Donaldson, 2011). The purpose was to let banks trade mortgage securities and securities similar to this nature. This scheme was created to allow banks to derive liquidity using particular kinds of assets of reasonable quality that remained by the end of 2007 for which the banks and other markets were not giving liquidity. The amount allocated for this program was ?200 billion (Donaldson, 2011). The bank of England also tried to cooperate with the bank of Canada, the bank of Japan and the Federal Reserve bank and declared it would work together to identify the problems with the US dollar (Donaldson, 2011) . The Bank of England was agreed to exchange the US dollar funds compared to collateral up to the amount of up to $40 billion. This sum was then increased to $80billin. Then a budget report was prepared and the government declared to release it (Donaldson, 2011). The pre budget report contained information to how the government would look to work on cross border situations with the European countries. The Bank of England was also allowed to set up an asset purchase unit around fifty billion pounds. This would include the Credit Guarantee Scheme, commercial paper, bonds, and loans etc. (Donaldson, 2011). The investment should be sufficient enough to restore banks to stability. Meeting capital objective is not the only goal but the primary objective is to make sure that the banks start showing profitability again after what has been spent to reconstruct it (International Monetary Fund, 2002). In order to accomplish this goal the government will need to make sure that the banks generates a sufficient rate of return. The government will have to analyze the situation of each bank before funding. It should make sure that the investment they are making should not fall short and the bank won’t have to apply for recapitalization later (International Monetary Fund, 2002). There are different kind of ways to invest like preferred and common stock. If the government makes investment in the form of common stock then it will have the right to partially or fully own the business. In preferred stock the company acts like an investor with no voting rights (International Monetary Fund, 2002). The parliament is yet to pass the vote on the banking bill which could further improve the situation as it claims it would. Though all or some of these policies are yet to be evaluated for their effectiveness, but it is still too early to say how they will shape the banking sector in the near future. The UK government, however, has been pro active with its policies (International Monetary Fund, 2002). It is still not known if the schemes and the policies it planned will eventually payoff but the results are proving to be good. So far the implementation of these rescue schemes have done the job as was expected out of them. It has improved the banking sector and has managed to avoid a collapse in the financial market. If not completely, it has somewhat restored the position of the overall banking system in the UK. State provided guarantees were instrumental in reconstructing the downward spiral and had a good result on banks in term of funding (International Monetary Fund, 2002). List of References Donaldson, C., 2011. Credit Crunch Health Care: How Economics Can Save Our Publicly Funded Health. 1st ed. Bristol: The Policy Press Publishing. Giudice, G., 2012. UK Economy: The Crisis in Perspective. 1st ed. New York: Routledge. International Monetary Fund, 2002. Balance of Payments Statistics Yearbook 2002. Washington: International Monetary Fund. Lybeck, J., 2011. A Global History of the Financial Crash of 2007-10. 1st ed. New York: Cambridge University Press. Singh, D., 2007. Banking Regulation of UK and Us Financial Markets. Hampshire: Ashgate Publishing Committee. Read More