by Mark Johnston
Before the ‘bubble’ in the UK lending had relative debt constraints such as 3 times income, which meant that people could borrow up to 3 times their annual income. However, once the financial boom hit prudence was thrown out of the window and these constraints were relaxed. Eventually borrowers were allowed to lend up to 6 times their annual income.
Danny Gabay, a director of Fathom Financial Consulting and a former bank official said the “trebling in house prices and surge in household debt from 90% to 162% of household income between 1997 and 2007 provided clear evidence of a bubble”.
Therefore in the credit crunch that followed many blamed banks and building societies especially the sub prime mortgage lenders and the customers who bought the products.
Some financial experts suggest that basically “our banking and financial system over extended itself”.
It seems then that greed at all levels had a huge hand in the UK’s financial ruin. Lenders were willing to accept mortgage applications from very risky borrowers and seemed completely disinterested in considering the risk as long as the short term return was strong.
Irresponsible governments and politicians who allowed the financial system to explode by permitting the build up of ludicrous amounts of debt are also in part to blame.
Sir Mervyn King, governor of the Bank of England recently claimed in BBC radio lecture that the bank “did preach about the risks of a financial crisis”.
However, a top economist and former bank member took issue with the claim that the bank had warned about the crisis saying “the notion that they were aware of this is laughable”.
The governor of the Bank of England underlined the scale of the financial crisis by claiming that ‘almost all of Britain’s banks would have failed had not the taxpayer support been extended’ to the entire system at the end of 2008 and not just the Royal bank of Scotland and Lloyds banking group, the 2 state backed lenders.
Many experts have blamed the banks for the recession and they have stressed that an overhaul of the financial system, including the separation of retail banking from ‘risky investment banking’ was essential to make the economy safer on a whole.
There no seems a great demand from the Bank of England to reform the banking system in light of the recession especially to ‘spare our grandchildren from a similar fate’.
Many people feel strongly that bankers in general “need to become better citizens”.
Extensive reform is already under way, as well as moving regulation back to the bank and ring fencing retail banking, the bank will have new powers from next year to ‘prevent a hangover by taking away the punchbowl just as the party in the financial system is getting going’.
The Bank of England have warned that some of the new powers they will have, such as possible loan to value (LTV) caps on mortgages, will not make them popular among bankers, politicians and even at times the general public.
Even though the bank is now taking on considerable new powers there is still not firm and agreed conclusions about the mistakes that were made.
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