The UK Banking Crisis: What Does it Mean for You?

These are dark days for the UK banking industry. Earlier this month, RBS (Royal Bank of Scotland) announced record losses of £28 billion in 2008. Meanwhile, Lloyds TSB announced that their profits fell by 80% to £807million last year, while HBOS (Halifax Bank of Scotland) recorded a loss of £10.8 billion.

Gordon Brown and the Government have spent the last twelve months taking a number of different steps to prop up the failing banking sector, and the wider economy.

These efforts have included nationalising banks such as Northern Rock and Bradford & Bingley, as well as taking over controlling interests in RBS and Lloyds TSB and HBOS.

The Bank of England has also tried to kick-start the economy by lowering interest rates from 5.0% down to 1.0% and cutting value added tax (VAT) from 17.5% to 15%.

But have these measures worked? And what impact will Government intervention have on your finances, as a borrower or saver?

The Potential Impact on Borrowers

The Government is working hard to support the banking industry because they need them to start getting back to doing what they are supposed to do, lending money.

Recent policy decisions have been made with the aim to get banks lending money again. This should ultimately prove to be positive news for borrowers, especially those first-time buyers – so important to housing market prosperity – that are seeking mortgages.

The Government is holding banks to an agreement that they return their lending levels back to those seen in 2007, before the credit crunch took hold. The expectation is that once we get back to those levels, house prices should stop falling and stabilise.

The Potential Impact On Savers

Before the Bank of England started cutting interest rates to historically low levels, savers, especially pensioners who relied on their savings as their main source of income, were about to get a rate of around 7.0% on their money.

However, as stockmarkets have continued to wobble and greater numbers of companies have been forced into bankruptcy, interest rates have been lowered dramatically in a bid to keep the economy afloat.

Now the average high street savings account is offering a rate of interest of less than 1.0%.

Why are rates so low? Banks are losing money rapidly, as their recent results reports have proved. Instead of looking after their customers, banks are trying to pay out as little as possible, and protect the capital they have left. As banks are still expected to struggle during this recession, the outlook for most savers therefore remains a gloomy one.

What Future is there for UK Banks?

Regardless of who you blame for the UK banking crisis (greedy bankers, poor government and regulation, or simply a nation overdependent on credit), the Government has taken unprecedented steps to try to keep the economy afloat and to prevent banks from going bust, something that would have disastrous implications for all of us.

Yet, despite these measures, the situation remains desperate and, for most people, little improvement has been seen so far. Mortgage borrowers continue to struggle with higher repayments, while most first time buyers cannot obtain a mortgage unless they have a 25% deposit. At the same time, savers and investors are seeing the value of their savings falling, both in cash accounts and on the stockmarket.

Some economists and industry officials have said that a full scale nationalisation of banks may still need to be considered, as the bailout packages were not going far enough to bring the situation under control.

What is clear, is that the face of banking in the UK has changed, and it may take quite some time before savers and borrowers feel that they have any confidence in our nation’s banking institutions again.