Ensuring financial stability
Financial markets influence the lives of every individual and business in the country. They are the core mechanism by which resources are efficiently allocated in an economy and a key driver of productivity, growth and opportunities. Financial instability, to the extent that it disrupts financial markets, can therefore affect everybody.
Since July 2007, the global economy has experienced levels of financial instability not seen for generations. The causes of this instability are varied and global. They include both macroeconomic factors, such as global financial imbalances, and microeconomic factors, such as the failure of banks to manage financial risk. The trigger for instability was the downturn in the US housing market, the ‘subprime’ end of which was a feature of many of the financial products that had been created in recent years. The instability grew steadily, peaking in the weeks following the collapse of Lehman Brothers, a US investment bank, in September 2008.
The Government’s objectives throughout this period have been to:
- support stability and restore confidence in the financial system;
- protect depositors’ money; and
- safeguarding the interests of taxpayers.
In September 2008, the crisis intensified and it became clear that not just individual institutions but the entire banking system was at risk of collapse. That would have had devastating consequences for UK households and businesses. The Government therefore intervened to prevent systemic collapse by addressing concerns around liquidity by making £200 billion available to the Bank of England’s existing Special Liquidity Scheme; addressing concerns around solvency, at least £50 billion was committed to a Bank Recapitalisation Fund; and addressing concerns about funding, a credit guarantee scheme was established.
Other governments around the world have followed with similar steps and market reactions have been generally positive. However financial markets remain fragile and volatile. The Government remains committed to taking action to meet its objectives. Given the global nature of the instability international action is needed. Looking forward the Government’s international and UK priorities include:
- as the 2009 Chair of the G20 making rapid progress on priority issues for the future of the international financial regulatory system; and
- continuing to monitor the financial system to ensure it is able to support the appropriate levels of lending to businesses and households.