Documents from Bank of England (BoE) court meetings during the financial crisis have been made public, showing the BoE was ill-prepared for the financial collapse.
The minutes revealed liquidity was identified as a primary concern in July 2007, but no action was taken. In addition, they record members’ acknowledgement of the risks posed to the economy by a failure of Northern Rock.
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In a statement to the press the BoE wrote: ‘Both the Bank and the Financial Services Authority (FSA) were in total agreement that if Northern Rock was allowed to fail it would create serious economic damage.’
Ineffective communication between parties and frantic efforts to rescue Northern Rock, lead to a failure in halting the bank’s collapse.
This resulted to a run on the bank, as savers rushed to withdraw cash, causing a credit crisis due to a ‘domino effect’.
According to the documents, an important reason behind the crisis mismanagement was that the roles of the Bank, the Treasury and the FSA were ill-defined.
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By GlobalData"At the time, [we] had no powers to take actions to manage macro-prudential risks. It was not responsible for banking supervision and there was no bank resolution authority," the bank said.
The period between 2007-9 was characterised by a liquidity crisis, which was followed by an insolvency crisis.
The banks apart from being unwilling to lend to each other, they reduced the number of loans to businesses.
Small businesses were hit the hardest, as they traditionally rely on bank debt for external financing.
According to a report by the Federation of Small Businesses in 2008, small businesses suffered from: hikes in interest rates for loans and overdrafts; poor treatment despite good credit histories; behavioural inconsistencies from strategic to branch level; the imposition of facility fees and reneging on promised finance.
Years after the financial crisis, SMEs are still struggling to obtain bank loans. Many companies resorted to crowdfunding or p2p lending for finance.
In the last Autumn Statement, the Chancellor announced a £1bn package to boost bank lending to small and medium-sized businesses (SMEs).
