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Global Meltdown: Impact on U.K.

Turnaround & Learning
Deepak Bhardwaj
Geeta Fatwani
Presented To:
Prof. Rohit Rai Tondon Jitendra Mandloi
Pooja Bansal
Dt . 25 th October 2010 Prateek Samtani

Facts about UK Economy

Ø 6th largest economy in the world by
nominal GDP & also by purchasing power
Ø 2nd largest financial economy in the World after
Ø UK GDP by Industrial sector: Services-76.2%,
Industry and Manufacturing-22.8% and
Ø GDP (PPP) : $2.128 trillion
Ø Exports: $357.3 billion, Imports: $486 billion
Ø Inflation rate (CPI): 3.1% in Aug’10, touched 5.2%
in sept’08
Ø Unemployment rate: 7.8% by July-end
Ø FTSE 100: Share index of highly capitalized UK
companies listed on London stock exchange

K. reached 1% to expand economy Ø In 2002-03. U. pushed interest rate down (3- 4%) for mortgage loans. US govt. resulting to more infrastructure Ø Everyone thought the property rates would continue to go up (both lenders and borrowers) Ø Quick gains on property in both US & UK(200%) Ø Less documentations & no creditability cross check Ø Ø .Global Meltdown: Introduction Ø In 2002-03. economy also had a downturn Ø Increasing subprime loan market Ø Boost to infrastructure sector in US by the govt.

Central bank Actions Liquidity Crunch for Businesses Excess Housing Inventory Bank Failures Fiscal Stimulus Package Bank Assets Levels depleted ousing Prices decline Home Owner Assistanc bility to refinance Mortgage Bank Losses Systematic rescue Mortgage Cash flow declines age Delinquency & Foreclosure .

Thomson Reuters and the London Interbank Offered Rate (LIBOR) Ø E.g.Adjustable R ate M ortgage ( ARM ) Ø An adjustable-rate mortgage (ARM) is a mortgage loan where the interest rate on the note is periodically adjusted based on a variety of indices Ø To ensure a steady margin for the lender Ø Agencies providing such indices are. 2/28 mortgage's initial interest rate is fixed for a period of two years and then resets to a floating rate for the remaining 28 years of the mortgage Ø LIBOR for August: 0. Bank rate at 0.943 on 1 Year.50 .

The securities are sold to investors who share the risk and reward from those assets Ø A way of diversifying risk and allowing the banks to make more loans (thus earn more fees) Ø Mortgage Backed Securities (MBS).S e cu ritiza tio n Ø Securitization is a structured finance process that distributes risk by aggregating assets in a pool (often by selling assets to a special purpose entity). then issuing new securities backed by the assets and their cash flows. Collateralized Debt Obligations (CDO) or Asset Backed Securities (ABS) .


window dressing (Low rate of interest) Ø Low Savings rate Ø More exposure to subprime mortgage Ø Lax Effect Ø Trading Securitized securities Ø Housing bubble burst in US & UK Ø Increasing subprime mortgage defaults Ø Inaccurate credit ratings by Experian.K.Reasons for Meltdown in U. Ø Govt. and Call Credit Ø Loss of confidence among banks & investors Ø Mark to market (made Liabilities>Assets) Ø Increase in energy prices fueled recession Ø . Equifax.

K.Impact on U. a record 6 consecutive quarters of negative growth . Economy Ø Decreased lending & high cost of borrowing Ø Recession.

(Cont.) Impact Ø Nationalization of private financial institutions Ø High unemployment rate(~8%) • .

(Cont.) Impact Ø High household debt • .

borrowing to control the situation  .) Impact Ø Heavy govt.(Cont.

6%. 3.(Cont.) Impact Ø Inflation in the Euro zone fell to 1.1% in UK Ø Realty prices fell down remarkably although will catch soon  Ø .

Corrective Measures Ø UK government has announced a package of £400 billion aimed at rescuing banking system Ø Banks were asked to increase their capital by at least 25 billion pound & borrow from government Ø 200 billion pound was available from Bank of England for short term borrowing to provide liquidity to banks Ø Injected money through nationalization of Northern Rock.  Bradford & Bingley Ø Bought 70% of the Royal Bank of Scotland (RBS) and Lloyds equity shares each Ø Ø .

Asset Backed Securities Guarantee Scheme (ABSGS).(Cont. the govt. Special Liquidity Scheme Ø Ø Ø .5% to encourage lending & borrowing Ø To stabilize the economy. Credit Guarantee Scheme (CGS).) Corrective Measures Ø Imposed a ban on short-selling financial stock temporarily Ø Allowed banks to insure against extreme losses and guarantee their debts Ø Interest rate fell down to record. 1. introduced a lot of reforms like Government Recapitalization Scheme.

to make capital investments of up to an aggregate of £50 billion in “Eligible Institutions”. Standard Chartered.) Corrective Measures Ø Government Recapitalization Scheme ü Enables the Govt.(Cont. Abbey National. Barclays. with schemes to help struggling mortgage borrowers stay in their homes ü Eligible Institutions published by HMT(Her Majesty's Treasury) include HBOS. and HSBC Ø . to strengthen their finances ü “Eligible Institutions” mean UK incorporated banks (including UK subsidiaries of foreign banks) that have a substantial business in the UK ü To support the Govt. RBS. Lloyds TSB. Nationwide.

in order to help refinance their funding obligations ü The initial uptake of this scheme by eligible banks has been estimated to amount to £250 billion ü Brought amendments reduced the fee payable to the Govt. ü new issuances of short-term or medium-term debt securities by Eligible Institutions. & extended the maximum term of guarantee to 5 years . in return for a fee & subject to certain conditions.(Cont. HMT will guarantee.) Corrective Measures Ø Credit Guarantee Scheme (CGS) ü To support UK banks in the face of the global banking crisis ü Under the CGS.

) Corrective Measures Ø Asset Backed Securities Guarantee Scheme (ABSGS) ü Govt. announced a new guarantee scheme ü commencing in April 2009 under which Eligible Institutions under the CGS may issue new asset backed securities (ABS) guarantee ü HMT will.(Cont. provide full or partial guarantees for eligible triple-A rated ABS. including mortgages and corporate and consumer debts ü Supporting lending to the wider economy (particularly mortgage lending) . in consultation with issuers and investors.

leading to the concern that other banks may be in financial difficulty .) Corrective Measures Ø Banking (Special Provisions) Act 2008 ü Enable the UK government to nationalize high- street banks under emergency circumstances by legislation ü The Act was introduced in order to nationalize the failing bank Northern Rock after the bank was supported by Bank of England credit ü The Bill was also sufficiently widely drawn to allow the nationalization of any financial institution.(Cont.

) Corrective Measures Ø Special Liquidity Scheme ü Improve the liquidity position of the banking system ü by allowing banks and building societies to swap their high quality mortgage-backed and other securities for UK Treasury Bills for up to three years. ü The Scheme was designed to finance part of the overhang of illiquid assets on banks' balance sheets by exchanging them temporarily for more easily tradable assets ü The banks swapped assets worth £185bn in the scheme & scheme has been closed for new exchanges .(Cont.

UK Rescue Plan Ø Ø Ø .

long term focus and simple financial products to be promoted to safeguard investors & economy from such crisis .Learning from the Crisis ØBetter analysis of macro-prudential problems – problems which lie Ø between macro-economic policy and financial system regulation is in Ø vital ØA large UK current account deficit. is good up to a certain level and it cannot replace or over rule Originate & Distribute Model ØLarge systemically important banking institutions should be restricted in undertaking proprietary activities that present particularly high risks ØTransparency. rapid credit extension and house Ø price rises are not in favor of long term growth ØNeed to do more sectoral analysis and be more willing to make judgments about the sustainability of whole business models ØSecuritized Credit Model.

and is expected to increase in the coming years Ø UK housing market has shown signs of uncertainty.4%.Current Updates Ø The BoE now expects GDP to grow about 2. House prices rose in 2009 and 2010.1%. currently at 1.5% next year — down from its forecast of 3. 3. but in late 2010 and 2011. expected to ease down Ø Massive cuts in public-sector spending Ø Budget deficit stands at 12% of GDP in 2010.2% Ø Credit conditions hadn't eased up as much as anticipated Ø Households may be less inclined to spend because they are worried about public sector cuts Ø Inflation is at same level. a further fall in prices is expected .