Subprime Crisis and the Banks in the UK - Case Study Example

Subprime crisis and the banks in UK Introduction Subprime crisis is also known as the subprime mortgage crisis and it has struck the countries especially the US and the UK since the year of 2007. This is the financial crisis that seems to have no solution at the present. The reason that has been told of the ongoing crisis is that the mortgage delinquencies have had a rapid rise since some years. Moreover the foreclosures have also seen a rapid rise in the country of US since some years and it had added up to the financial crisis. This is the financial crisis that has affected the banks all around the world mostly in the major sense. In addition to this the financial markets have also suffered a lot owing to this financial crisis. The crisis has its beginning since the conclusion of the 20th century however it has came up-close in the year of 2007. Because of this crisis the world has been able to notice the major hidden weaknesses in the financial markets all around the world. Moreover the crisis has been able to pinpoint the weaknesses in the way the financial industry as well as the global markets have been regulated in the past few years . It has been noticed that the 80% of the mortgages from the US issued to the subprime borrowers were the mortgages that were defined as to be the rate adjustable. During the period of 2006 and 2007 the major change was seen when the house prices within the US began to show the decline and this was the time when the most difficult task was the refinancing. During the same period the rate adjustable mortgages began to reset at much higher rates whereas the soaring was noticed in the case of the mortgage delinquencies. Securities began to be backed with the subprime mortgages and these were all held by some of the financial firms and these lost most of the value. This consequently ended up in the banks having no capital. The enterprises that were sponsored by the US government also started to decline and the credit began to sour all around the world. Subprime crisis: Background In the year of 2007, the sales of the houses based in the US continue to decline rapidly. As compared to the decline in the house sales in the year of 1989, this decline had been the record of its own kind and it had been the kind of crisis that was undesired. Moreover in the first quarter of 2007, the house price index records had been released by the S&P/Case-Shiller. This is the record that reflects the year over year decline in the house prices since the year of 1991. The records reveals that since the year of 1991, the financial industry has been facing many problems and the subprime mortgage industry had been collapsed in 2007. The decline that was noticed in the surge of foreclosure activity had been noticed to be double as compared to the activity in the year of 2006. The interest rates have been seen to be rising and this is the factor that makes the house prices rose higher as per reflected by the records. Since the start of the year of 2008 many of the major investors had been arrested for the frauds in the mortgage and the list includes around 406 people along with Bear Sterns fund managers. Along with the many banks that the Us has IndyMac bank is one of the banks which is known to be the largest savings and loans association in the US. Moreover, it is known to be the seventh largest mortgage originator in the US. Later the same year it was noticed that Indymac Bank which is the subsidiary of Independent National Mortgage Corporation, had to be placed for the receiving by the Federal Deposit Insurance Corporation by the office of Thrift Supervision. If the banking sector history of the United States is taken into account than it can be noticed that this is the loss that had been the greatest loss in the banking history of US. To be specific this is the failure that can be counted as the fourth greatest economic failure in the US history. Major banks and the financial institutions form the UK as well as Us were the one who had heavily invested in the mortgage backed securities. In this year the banks as well as the financial institutions reported the loss of $435 billion in the July of 2008. Banks and the mortgage crisis The way the banks have been seen to be working in the case of the mortgage lending is in such a way that the money and the payments that the customers pay to the banks is used by the banks to pay their mortgage lending. As the financial crisis has hot the world in the global way effecting the customers from all around the world so the customers are low in payment to the banks which limits the payments by the banks to the mortgage lenders. Moreover this is the factor that limits the mortgage lending by the banks. As the financial markets are the mains that have been hit mainly by the mortgage crisis however the ripple effect has been felt by the equity markets all around the globe. The instillation of the money was being continuously being done from the markets based in the US. Thereby it can be inferred here that the major effect of the mortgage crisis was to the equity markets. In the case of the banks especially the UK banks, for the recovery of the debts that they had, the banks were in the streets and most of the foreclosures owned by the banks had been sold in the auctions. Reason of the mortgage crisis The main reason for the mortgage crisis is the defaults that have been noticed in the home loans. These are the loans that trigger the foreclosures as well as the sell offs. High risk loans were being issued where the financing was being done more than the suggested values. The housing companies in the UK and US had seen enormous pressures as the homeowners themselves were being pressurized because of the increase in the rates. One of the main reasons that is counted among the reasons of the mortgage crisis is the mortgage crisis. This is the reason that lead the banks and the financial institutions to the crisis and no financers are to be found as now the over financing has been done. Losses which are being faced by the home owners are nowhere to be solved and to be recovered. The selling binges and the auction selling that the banks are going through has no solution in the near future and it seems to be unstoppable. The bailout plans for the banks A bailout plan of approximately US$ 900 billion had been planned by the US and the UK governments while the older value that has been noticed was around US$ 70 billion. This is the bailout plan that may be able to purchase the loans from the banks as well as it may be able to support the homeowners in deep financial loss for a short period of time. Comparison of banks in UK The banking sector in the UK is considered to be one of the third largest banking sector on the entire globe. The first and second most strongest banking sectors are form the US and Japan. The UK banking sectors holds some of the largest commercial banking industries in the world. Moreover the UK is counted to be the major centre fir investment as well as private banking all around the globe. Thus it can be inferred here that the UK banking sector has been the powerful financial institution on the globe. The strength of the banking sector in UK is very strongly reflected by the presence that the sector has as well as the great assets that the banks in London have. In the year of 2004 it had been noticed that the total number of banks that UK had was around 700. It has been seen that since some years the number of the banks in the UK sector has declined however there has been an increase in the financial strength of these banks. Moreover the size of the banks had also been seen to increase in the past years. Because of the presence of the European economic area (EEA) the presence of the banks had been seen to be increased in the past few years. If the comparison of the assets and the liabilities within the UK banking sector is made than it can be seen that the assets total up to around £4,165 billion and this was the amount present until the end of 2003. During the last years the shares that the banks had been holding decreased to some extent still the foreign banks in the UK had been functioning in a better manner and were holding the banking sector of UK very firmly. The start of reformation of the banks in UK occurred in the year of 2001 where this can be represented by the fact that the UK regulation Responsibility for the authorization and supervision of banks had been passed from the Bank of England to the Financial Services Authority. Financial; services authority is the non government body in the UK and this is responsible for the use of the statutory powers under the rules and regulations of Financial Services and Markets Act 2000. FSA is responsible to report the annual reports in the activities to the Treasury. The Treasury lays the report in front of the parliament. FSA is required to complete four objectives that are defined by the FSMA and the main goals include the maintenance of the confidence in the UK financial systems, to promote the public awareness in regards to the UK banks and the financial systems , to give the best level of protection to the consumers and in addition to this making the consumers realize their responsibilities, and the last one that holds most of the importance is that the FSA should take steps to stop the financial crimes. Subprime lending This is the term that refers to the lending that is done by the financial institutions in the ways that the prime standards of the lending are not achieved. In this way the loans are made to be more in the riskier phases. Moreover the consumer loans are put into the most risky category. The standards of the loans are represented by the size of the loans, the category and the traditional or nontraditional structure of the loans. In the case if this crisis there were more than a hundred subprime lenders who had been filed for frauds or some had been filed for bankruptcy. One of the most important lenders in this list included the New Century Financial Corporation. This is the corporation that has been known as the biggest subprime lending company in the states. The amount of the mortgage backed securities that the failure of these companies has caused rounds up to around US$ 7 trillion. All the investment that had been made by the financial markets had been noticed to become valueless in a few days. This made the banks all over the word to rein there lending to each other which ultimately lead to the rise in the interest rates and it was difficult even more to maintain the credit lines by the banks as well as the financial institutions. In the case of UK as some critics see, the UK housing market will be the one unaffected by the subprime mortgage crisis. However in the year if 2005 as has been noticed one of the greatest UK based mortgage lenders, Northern Rock had to contact the Bank of England for the sake of an emergency finding. Bank of England This UK based bank has many responsibilities and this includes the main point that the overall stability of the financial systems is to be maintained. Some of the previous responsibilities that the banks was holding included the supervision of the individual banks had been taken over by the FSA therefore the only responsibility that the bank has to look for is to look for the systemic financial risk. This main responsibility is inclusive of the infrastructure of the financial system in particular the payment systems. The banking and the financial marketing developments are also monitored by the bank of England. A Memorandum of Understanding exists between the bank of England, Treasury and the FSA. This is explanative of the fact that the three authorities will be looking over the financial systems more closely. In addition to this the some of the financial firms are regulated by the FSA whereas the main aspects to this regulation include the admission of these firms to the regulatory system, the business standards are set for the firms by the FSA, the monitoring of the standards that have to be delivered by the financial institutions. Thereby in this regard the FSA is the main institution that works and closely monitors the banking sector in the UK along with the challenges that it has to face in the crisis situation. Read More