The impact of the financial crises on banks

In 2007-2008 the financial and banking world suffered global financial crises. These crises are considered by many economists to be the worst since the Great Depression of the 1930s. The Great Depression was a severe worldwide economic crisis suffered in the decade before the Second World War. The global depression of 2007-2008 has resulted in the collapse of large financial institutes and the bailout of banks by national government.

The first event of note occurred in the United Kingdom in August 2007 when BNP Paribas (a French global banking group) halted withdrawals from three of its investment funds that specialised in U.S mortgage debt. The significance of this event was not immediately recognized but soon led to panic as investors and savers attempted to liquidate assets deposited in highly leveraged financial institutes.

The international Monetary fund (IMF) estimated that large U.S and European banks lost more than $1 trillion assets and from bad loans from January 2007 to September 2009. U.S banks losses were forecast to hit $1 trillion and European bank losses will reach $1.6 trillion. The IMF estimated that U.S banks were about 60% through their losses but British and Euro banks only 40%.

People queuing outside a branch in Golders Green London, on 14 September 2007, to withdraw their savings due to fallout from the crisis

The first victim in British banking was Northern Rock. The highly leveraged nature of its business led the bank to request security from the Bank of England (BoE). This in turn led to investor panic and a bank-run. The U.K government have failed to find a private investor for the bank and it was taken into the public sector. Northern Rock’s problems proved to be an early indication of the troubles that would soon befall other bank and financial institutions in the UK.