UK
Credit Crunch
Northern
Rock and the Credit Crunch
Events at
Northern Rock have been much reported over the last
six months or so, right through from the initial news
of the funding crisis within the institution through
to its recent nationalisation. Explanations of the crisis
and the wider economic situation that created it have
invariably involved discussion of the ‘credit
crunch’ and its impact on Northern Rock and elsewhere.
But what exactly is the credit crunch, and what impact
is it expected to have on other institutions, as well
as normal people?
The credit
crunch refers to a decrease in the amount of funds available
to people who wish to borrow money, and hence an increase
in the cost of getting a loan. Such a situation is created
by a decline in confidence in borrowers on behalf the
lender, be the borrowers other institutions or individuals.
In recent years, inappropriate lending took place as
a result of high house prices, with the end result being
that when house prices began to fall some people were
unable to repay their mortgages, and lenders lost significant
amounts of money. This occurred primarily in the United
States, and was known as the subprime mortgage crisis.
Its effects were quickly felt globally.
Banks became
more wary of lending to each other as a result of this
crisis, as they were unsure about which institutions
were financial stable and would be able to repay the
debt. Ordinary people are now feeling the effects of
this loss of liquidity, with it becoming very difficult
to obtain a loan or a mortgage as lenders were unwilling
to take risks given the new climate. Those that did
manage to borrow money did so at a much greater cost
than before. This inability or reluctance or financial
institutions to lend money resulted in a lack of access
to money on the part of individuals or businesses, with
several negative effects. This phenomenon is a credit
crunch.
Northern
Rock was affected by the credit crunch because its business
involved a lot of borrowing money in order to lend it
elsewhere, and when the market lost its liquidity it
found itself with a significant funding gap. In itself
this was a serious crisis, but what compounded
their problems was the public reaction once their request
to the Bank of England to lend it money was made public.
It suffered the first run on a British bank in decades
and saw its share price collapse dramatically.
Eventually
the market will regain liquidity and confidence will
be restored to institutions and individuals alike, but
it is unclear when this will happen. At present, the
situation remains whereby borrowing money is either
impossible or expensive. Nevertheless, mortgages and
loans are still available, and it is worth shopping
around so see if you can find an option to suit you.
Take a look at NatWest for a range of mortgages,
while Beat that Quote will be able to give you instant
comparison on loans
from a range of providers.
The
following APR relates to the above products only.
THE OVERALL COST FOR COMPARISON IS :-
8.9%
APR
The actual rate available will depend upon your
circumstances ask for a personalised illustration. |
