The effects of the credit crunch in the UK

Over recent weeks the words ‘credit crunch’ have been all over the financial headlines in the UK, and the effects of the turmoil that has hit the financial markets both in the UK and in other parts of the world have been reflected in a number of ways, affecting both financial institutions and consumers. The credit crunch was sparked as a result of the housing slump, rising interest rates, and record defaults in the sub-prime sector of the United States, and over recent weeks the global repercussions of this crisis have become increasingly evident.

The financial turmoil has hit hard on many levels within the UK. Financial institutions have suffered as a result of the turmoil, as have many consumers. Amongst the things affected in the UK as a result of the credit crunch are:

Northern Rock: This stricken lender has become one of the major casualties of the credit crisis, after it had to go to the Bank of England for an emergency loan. After this fact was discovered many of the bank’s 1.5 million savers queued at all hours of the day and night in order to withdraw their savings amidst fears that the bank might be on the verge of collapse – a sad state of affairs for a lender that enjoyed a reputation as the fifth largest mortgage lender in the UK. In the space of a few days over two billion pounds was withdrawn from Northern Rock by worried savers. Not only did this damage the company financially but it also did not favours in terms of its reputation, and many experts predicted that even if the bank survived the financial losses it would not survive the damage to its reputation. Northern Rock also saw its share prices plummet at the start of the chaos, with over 80% being shaved of share values.

The bank has now decided to take two thirds of its mortgage products off the market in order to try and aid its recovery, and has been in talks with a number of other parties with regards to the sale of all or part of the business. However, more recently Citigroup has announced that it will be bailing out the bank with a multibillion pound loan, details of which are still to be announced.

Another victim of the credit crisis was Victoria Mortgages, which announced some weeks ago that it was going into administration as a result of escalating costs.

Savings guarantees: As a result of the Northern Rock situation the Bank of England has announced that it will be increasing the government’s guarantee on savings in similar situations, in the hope that it will help to avoid mass withdrawals such as those suffered by Northern Rock. Savers will now have the first £35,000 worth of savings guaranteed in full, whereas previously the 100% guarantee only applied to savings of up to £2000. This could be considered as one of the better things to arise as a result of the credit crisis.

Increased difficulties for sub-prime consumers: With consumer debt and bad debt at sky high levels many consumers have now found themselves with damaged credit. However, as a result of more stringent lending criteria amongst lenders that do not want to find themselves facing the same level of sub-prime defaults as the United States bad credit consumers may now find it difficult to get mortgage as well as other types of finance. Some lenders have withdrawn some of their sub-prime products from the market, and others have raised interest rates on them to levels that would financially cripple borrowers.

Increased interest rates from lenders: In addition to many companies increasing their mortgage rates, the credit crunch has also seen many lenders raise the interest rates charges on their unsecured loans. Interest rates have risen by up to 4% in some cases, with increased wariness from lenders and higher inter-bank charges being blamed for the decision to increase these interest rates.

Bank of England base rate: Another of the better effects that the financial turmoil has had in the UK is the Bank of England’s decision to keep interest rates on hold for the past three months. Since August of last year interest rates in the UK have risen five times, each by 0,25%, taking the base rate from 4.5% last August to 5.75% by this July. Many experts had predicted that the interest rate would rise at least once more this year, taking the base rate to 6%. However, since July the Bank of England has decided to keep interest rates on hold, and has stated that this is partly due to the turmoil in the financial markets, the full effects of which have not been made clear in the UK. Many analysts are now predicting that in order to try and ease the situation, and also as a result of CPI inflation coming back under control, the Bank of England may even cut interest rates before the year is out.