U.K. approach to financial crisis management

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Author: Dalvinder Singh
Date: Winter 2011
Publisher: University of Iowa, Transnational Law & Contemporary Problems
Document Type: Article
Length: 23,600 words
Lexile Measure: 1930L

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I. INTRODUCTION 869 II. THE CAUSES AND CONSEQUENCES OF THE FINANCIAL CRISIS 870 A. The U.K. Casualties 876 B. The Icelandic Banks and the U.K. Experience 879 III. THE MACRO- AND MICRO-PRUDENTIAL SYSTEM OF OVERSIGHT TO 882 CONTAIN A FINANCIAL CRISIS IV. THE U.K. TRIPARTITE AUTHORITIES AND THE MEMORANDUM OF 886 UNDERSTANDING: STRUCTURING DECISION-MAKING V. LENDER OF LAST RESORT 891 A. Northern Rock and Lender of Last Resort? 895 VI. BEYOND LENDER OF LAST RESORT 900 A. Blanket Guarantees 902 B. The Rescue Package of October 2008 907 C. The Special Liquidity Scheme 910 D. The U.K. Government's Asset Protection Scheme 912 E. United Kingdom Financial Investments Ltd 914 F. Financial Crisis Management: Some Reflections on the 917 Responses thus Far VII. CONCLUSION 921

ABSTRACT

National governments have been forced to use an extraordinary amount of public resources and techniques to contain the global financial crisis ("the crisis"). This Article analyzes the role of the U.K. Tripartite Authorities in dealing with the crisis--both the "ordinary" measures it used, such as the Bank of England's role as Lender of Last Resort, and the "extraordinary" measures it used, such as blanket guarantees, recapitalization, and asset purchase schemes. It evaluates the U.K. response and the challenges of this period of containment by comparing issues that arose from past financial crises. This Article concludes that the containment of a financial crisis of systemic proportions requires both an overarching and a case-by-case approach to deal with banks experiencing insolvency rather than liquidity problems.

I. INTRODUCTION

Containing the recent financial crisis that has beset global financial markets has required a complex, multifaceted response. The crisis arose when banks, the principal vehicle for providing credit in the economy, ceased to function and provide credit on the kind of scale to which the economy had become accustomed. When the banks and the financial system lost confidence in one another, governments intervened. In light of the international financial crisis, this Article analyzes how the U.K. Tripartite Authorities ("U.K. Authorities"), namely H.M. Treasury, Bank of England ("the Bank"), and the Financial Services Authority ("FSA"), worked together to contain the financial crisis in the United Kingdom. This Article primarily analyzes, in light of international experience, some of the techniques the U.K. Authorities used to contain the financial crisis.

Part II of the Article explores the causes and consequences of the financial crisis, both in the United States and more thoroughly in the United Kingdom. It primarily explores the crisis in two broad periods--2007 and late 2008--namely, before and after the collapse of Lehman Brothers ("Lehman"). It provides context for the Article by highlighting that what occurred in the international financial markets, after the collapse of Lehman, were unforeseen events, which required unprecedented government intervention. While the crisis in confidence in the financial markets reached a turning point in mid-2007, the economists working in the markets expected this to be short lived and containable. But the collapse of confidence into a panic in later 2008 was not foreseeable, and it resulted in...

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Gale Document Number: GALE|A249224666