A Detailed Analysis of the Global Financial Crisis and UK Regulations

This report provides a comprehensive analysis of the global financial crisis, particularly focusing on its impact on the United Kingdom and its financial system. It begins with an introduction to the global financial crisis, highlighting its origins, key events, and the economic downturn it triggered. The report then delves into the specific impact of the crisis on the UK, including economic downturn, unemployment, and increased debt levels. It examines the responses of the UK's financial bodies and regulatory frameworks, specifically the Financial Conduct Authority, in managing the crisis and stabilizing the market. The report also discusses recent regulations implemented in the UK to address the financial crisis and prevent future occurrences, concluding with a summary of the key findings and implications.

LAW QUESTION
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INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
Global financial crisis.................................................................................................................1
Impact of global financial crisis on UK......................................................................................4
UK response towards financial Crisis and its financial system..................................................5
Recent regulations of UK financial system.................................................................................9
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................11
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INTRODUCTION
Global financial crisis is a term which means shortage of funds across the globe due to
fluctuation in several factors that affects international finance department. However, financial
crisis of 2007-2008 is known as global financial crisis and almost large number of economists
said that it was a worst crisis since the Great depression of 1930s 1. Therefore, assignment is
going to highlight the major financial crisis which affects the whole world and its influence on
entire global platform. In order to cope up with financial issue, various international institutions
are coming up with new policies or ideas to control this situation. Along with this, regulatory
frameworks and legitimate bodies of UK have taken major steps by coming up with new legal
acts for supporting the nation. Hence, two new regulators are mainly outlined in the report which
replaced the existing financial services authority for stabilizing the UK condition.
MAIN BODY
Global financial crisis
Global financial crisis is denoted the time period where there was availability of
extreme stress in global financial markets and banking systems in almost mid of 2007 till early of
2009. Basically, it was caused due to the deregulation in financial industry which allows the
banks to get involved in hedge fund trading with derivates. After that, bank demanded more
mortgagees for supporting the profitable sale of that derivates. As a result, entire scenario creates
a breathtaking financial crisis which led to great recession. By the September, 2008 financial
crisis become more worsened as stock markets across the globe crashed as well as highly
volatile. As a result, confidence of customers also hit rock bottom due to which every individual
tightened their belts and lost their faith on marketplace 2.
From the sub-prime to downturn, five phases of most dangerous crisis almost hit the
entire globe economy since the Great depression which was found in these five dates such as; 9
august 2017, 15th September 2008, 2nd April 2009, 9th May 2010, 5th August, 2011. Initial
1 Helleiner, E., 2011. Understanding the 2007–2008 global financial crisis: Lessons for
scholars of international political economy. Annual Review of Political Science, 14,
pp.67-87.
2 Erkens, D.H., Hung, M. and Matos, P., 2012. Corporate governance in the 2007–2008
financial crisis: Evidence from financial institutions worldwide. Journal of Corporate
Finance, 18(2), pp.389-411.
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phase is on 9th August 2007 started with the seizure in entire banking system when Merril Lynch
trader Strenfors got a call which was change his life. On the other hand, French Bank BNP
Paribas was frozen $2.55 billion worth of finances citing an “evaporation of liquidity”. In this
day, almost entire world get changed and distributed after the news comes out about injected $
11.3 billion into financial markets by European central bank and US federal Reserved. After one
month from this incident, customers queued for acquiring their money out from Northern Rock
which was for the first time in the 150 years of this institution 3. It’s really a sparking issue
which is a great exposure for individual banks in which trust evaporated overnight because of
this; all the banks stopped doing business with each other.
According to the above graphical representation, it has been assessed that major reason
behind financial crisis was banks because they were created too much money in a fastest way.
All the time a bank offered a loan for creating a new money which shows in a financial crisis that
banks was get succeeded in created a huge sums of funds. By analysing the graph, it was clearly
showed that just in 7 years, banks was doubled the amount of money as well as debt in the
3 Larry Elliott, 2011 . [Online]. Available through<
https://www.theguardian.com/business/2011/aug/07/global-financial-crisis-key-stages.
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economy. In fact, very little amount of trillion pounds that banks shaped in between 2000-2007
were offered to business outside of the financial sector. For example; almost 31% was used by
residential property which resulted in maximization of house prices faster than wages. Apart
from this, nearly 20% flows into commercial real estate such as; office buildings or any other
organizational property. Moreover, almost 32% was offered to financial sector and same for
markets also which eventually imploded during financial crisis. In fact, only 8% of entire money
which was created by banks at that time was offered to business outside of financial sector.
Further, rest 8% was utilized into credit cards and personal loans.
Consequently, debts are becoming higher and Unpayable because lending large amount
of funds into the property resulted in maximization of house prices as well as increase the level
of personal debt. Along with this, interest was also requisite to pay on the loans which were
making by each or every banks. Due to this, debt is becoming higher or faster as compared to
incomes as well as few individuals are also get enable to keep up with repayments. In this
situation, customers stopped repaying of loans and banks were finding themselves in a great
danger of becoming bankrupt 4.
On 15th September 2018, one of the major announcement shaken the entire world that is;
bankruptcy of Lehman brothers at midnight Monday. Thus, it shows that financial crisis was
now entered into an acute phase marked by failures of major American and European banks. As
a result, governing bodies of Americans and European Union tries to rescue distressed financial
institutions. For example; emerging passage of Emergency Economic stabilization Act of 2008
whereas infusion of funds into major banks in European countries. Apart from this, number of
financial institutions in Europe was encountering a major liquidity issue due to which they all are
demanding funds for raising their capital adequacy ratio.
For various Americans, financial crisis becoming more worst in 2009 such as; in March
plummeted of market more as well as panicking to those investors who was thinking that
worsened situation was over. It means, in April 2007 trust from financial system are breaking
down which was caused subprime Mortgage crisis. In the winter of 2008-09, G20 group which
was recently formed engaged in coordinating with others for developing the nations and trying to
4 Claessens, S and et. al., 2010. Cross-country experiences and policy implications from
the global financial crisis. Economic Policy, 25(62), pp.267-293.
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defend recession 5. For example; cutting of interest rates, announce fiscal stimulus packages of
distinct sizes as well as creation of electronic money with the use of quantitative easing. On 2nd
April 2009 in London G20 submitted that leaders of world committed to themselves to around
this much of “$5tn (£3tn)” fiscal expansion as well as extra almost $1.1tn of resources for
supporting International Monetary fund’s (Larry Elliott, 2011 ). As , their main motive is to
facilitate global institutions for boosting the jobs, growth and to modify the banks.
9th may 2010 is a day when concerned was switched from private sector to public sector.
At that time, IMF and European Union announced that they are going to offer financial support
to Greece. Another day of financial crisis was on 5th august 2011 was remembered as most
memorable day when US hegemony was lost. Although, it was really terrible news for Barack
Obama as he was not delivered economic recovery. As a result, US were drowning in a negative
equity and foreclosed houses. Moreover, Fiscal policy was tightened in coming months due to
tax breaks expire and public spending was also cut. Hence, it has been understood that all these
dates are remarkable in world history as these duration of recession was shaken the each or every
financial markets across the globe.
Impact of global financial crisis on UK
Whole world is getting influenced by this major fluctuation of finance market. From
which UK was also affected very badly and major fall in the national economy. For example;
economic downturn, unemployment, maximization of debt henceforth. In fact, number of authors
and specialist has expressed their opinions towards impact of financial crisis on UK. As per the
major article of Financial Express, it was clearly stated that crisis of 2007-2008 was the great
blunder after the great depression of 1930s because it was rendered almost 8.8 million people of
United states unemployed alone. Main target of this crisis are advanced countries such as; United
states, Germany, United Kingdom and Hong Kong 6.
5 Ivashina, V. and Scharfstein, D., 2010. Bank lending during the financial crisis of
2008. Journal of Financial economics, 97(3), pp.319-338.
6 How badly 2008 financial crisis hurt US, UK, Germany, 2018. [Online]. Available
through<hhttps://www.financialexpress.com/economy/how-badly-2008-financial-crisis-
hurt-us-uk-germany-this-1-chart-shows-it-all/1146819/ >.
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From the above diagrammatic representation, it has been determined that advanced
countries are circulated around major trauma and encountered several ups or downs in between
2005 to 2012. For example; UK is also effecting by the crisis in various manner as common
people of the nation are suffering from distinct day to day problems.
As per the viewpoint of Gordon Rayner, 2008 “UK was encountered worst financial
crisis in decades” because of America latest corporate meltdown. However, one of the biggest
mortgage lender of Britain’s is Halifax Bank of Scotland because it lost around 13% of its value
and scared that profit of the bank is directly influenced by global credit crunch. Moreover,
Barclays and Royal Bank of Scotland wiped off their share price by 9%. Thus, Bank of England
has filled approximately £5 billion into money markets in order to restoring the confidence in
banking system. Although, this solution is not much enough to defend the economy for
becoming worse because predicators are saying that worst is yet to come. Bear steams which is
the night biggest investment bank across the globe was in the situation of getting collapsed due
to heavy losses because of sub-prime mortgage crisis. As a result, other banking giants are
fearing and in a major trouble 7.
On the other hand, Prime Minister Gordon Brown is promising to initiate whatever action
is required for maintaining the stability of economy. Whereas, Terry Smith who was a chief
executive of Tullett Prebon and a expertise broker in the city states that “I was working in
7 Shiller, R.J., 2012. The subprime solution: how today's global financial crisis happened,
and what to do about it. Princeton University Press.
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finance in current city as well as across the globe for nearly 34 years but I haven’t seen anything
like this”. On contrary to this, David Buick of spread betting firm Cantor Index states that “None
of the individual who is living in current phase have ever face this kind of banking trauma. In
fact I was working from last 46 years but out looked has never seen as bleak”. Mainly, this
turmoil is immediately knocking and affecting for homeowners because of which families of
Britain are already suffering from credit crunch. Since last summer of year 2008 bills of
household are steadily increased 8.
Apart from this, average houses of UK was also lost almost 20% of its value in 16
months to February, 2009 and transaction levels was an averaged nearly 1.65 million in a year in
a last decade, plummeted to almost 730, 000 in next 12 months till June, 2016. On the other
hand, there was one report from property advisor Savills who states that influence of crisis
pushed UK into deepest post-war recession. In fact, it was still felt in housing market of UK as
new homeowners mainly reliant on “the Bank of Mum and Dad”, current house owners are
struggling to trade up the market 9.
UK response towards financial Crisis and its financial system
Financial bodies of UK systems try their best for maintaining stability at EU marketplace.
Financial Conduct Authority plays a major role in managing instability as this framework
considered as a financial regulatory body in UK. Basically, it operates independently of UK
governing bodies and financed by charging fees from various members of financial services
industry. Because of perceived regulatory failure of banks while financial crisis of 2007-2008,
UK governing bodies decided for restructuring of this finance regulation and abolish FSA with
effect from 1st April, 2013. At that time, financial services authority was totally criticised as well
regarded by most of commentators as this body is unfit for financial purpose. Hence, Chancellor
of Exchequer, George Osborne announced his strategy for abolishing the Financial Regulatory
Body and replaced it 10. As governing bodies claimed that current regime requisite to reform
because this association “gets failed when tested during crisis”. In fact, FSA continuously failed
8 UK facing worst financial crisis 'in decades', 2008. [Online]. Available
throughhttps://www.telegraph.co.uk/finance/markets/2786497/UK-facing-worst-financial-crisis-in-decades.html
9 Thomas Colson, 2017. [Online]. Available through<
https://www.businessinsider.com/how-2007-financial-crisis-transformed-uk-housing-market-
2017-7?IR=T>.
10 Reinhart, C.M. and Rogoff, K.S., 2011. From financial crash to debt crisis. American
Economic Review, 101(5), pp.1676-1706.
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to fulfils its promises such as; enabled in maintaining marketing confidence, failed in defending
both stability of UK financial system as well as consumer interests 11. Most importantly, not able
to fight with financial crime which was occurred during 2007-2008.
By assessing this above graph, it has been understood that there was a great fall in GDP
of the UK economy in between 2008-2009. Along with this, diagram is clearly highlighting that
UK recovery was seen as most slowest as compared to other. It means, FSA is totally failed in
managing this major turmoil which is almost destroying the markets and economy of a nation. In
fact, future of Britain was in great dark and people are getting more scared with this
unpredictable situation 12.
FSA was established by financial services and markets act 2000 to work as an
independent non-governmental body in order to act as a statutory regulator of UK’s financial
service sector. Thus, failing of this association was come out after collapsed of Royal Bank of
Scotland. As a result, FSA produced an investigation report which was less than 300 words. On
the other hand, the Icelandic Truth Commission designed a report which was of almost over
11 Shiller, R.J., 2012. The subprime solution: how today's global financial crisis happened,
and what to do about it. Princeton University Press.
12 Tejvan Pettinger, 2017. [Online]. Available through<
https://www.economicshelp.org/blog/7501/economics/the-great-recession/>.
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2200 pages in length. However, major content that is highlighted in the whole report is that; FSA
get failed in defending banking meltdown. By thoroughgoing with all the relevant information
about FSA and it its downturn, various members argued and demanded the replacement of this
financial institution. In fact, number of lawyers and jury members are raising their voice against
this major crisis as it influence the whole UK and created a financial overhauled in EU.
From the diagrammatic representation, it has been identified that governing bodies of UK
are really spending in the development of nation by enhancing labours. Along with this, trying
to come up with various ideas for managing drastic change which affects the lives of whole
nation 13.
Hence, FSA was replaced by the “Twin Peaks” named as “Financial Conduct
Authority” and “Prudential Regulation Authority”. These two frameworks was official came
into force in almost 1st April, 2013 and promises number of things to the UK financial service
sector. However, foremost responsibility of FCA is to controlled financial organizations who is
offering services to the consumers and tries to maintain the integrity of UK’s financial markets
14. Some of the examples are; major focus on customers, problems related with misconduct like
13 Tejvan Pettinger, 2017. [Online]. Available through<
https://www.economicshelp.org/blog/7501/economics/the-great-recession/>.
14 Reinhart, C.M. and Rogoff, K.S., 2011. From financial crash to debt crisis. American
Economic Review, 101(5), pp.1676-1706.
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Libor scandal, abusing of market as well as competitiveness. On the other hand, PRA was
formed as a part of The Bank of England and works along with FCA in “twin peaks”.
Additionally, liable for regulating almost 1700 banks across the UK, building communities and
societies as well as managing investment firms.
FCA is considered as regulator of almost 56,000 financial services firms as well as
financial markets at UK marketplace. On the other hand, prudential regulator is offer around
24,000 of those organizations. Basically, these two were established on 1st APRIL, 2013 for
managing financial trauma of UK as well as in order to act on the behalf of Financial Services
Authority. Basically, their main objective is to make sure that all the related markets work well.
For making more advanced to strategic objectives there are almost three main targets such as;
Protect consumers- in order to secure an effective degree of prevention for customers 15.
Defend financial markets- for defending and enhancing the integrity of UK financial system.
Promote competition- encouraging healthy competition in the interests of consumers.
Hence, major reason behind establishing these two twin peaks is to make that UK have an
effective, creative and trusted financial service sector in order to meet the requirements of users.
Although, initially FCA was handling around 26000 firms and in 2014, took over nearly 50000
client credit firms from which few of them was already regulated for some other activity. After
that authorisation was took place by 31st march, 2016 in order to carrying regulation on credit
activities. Mainly, these two firms are famous for their major aim that is “identify and respond
instantly and effectively towards emerging issues before it will convert into major trauma”. As a
result, financial system of UK plays a major role for stabilizing the UK conditions after financial
crisis of 2007-2008 by replacing “FSA” with “twin peaks” 16.
As per the Department for Business, Innovation & Skills and HM Treasury, on June
16, 2011, Chancellor of Exchequer announced that there must be a creation of Independent
Commission for Banking services which is chaired by Sir John Vickers. Their main objectives is
to promote stability in UK banks by making suitable plans and policies because Banks are faces
15 Laeven, L. and Valencia, F., 2012. Resolution of banking crises. In Handbook of
Safeguarding Global Financial Stability(pp. 231-258).
16 Geels, F.W., 2013. The impact of the financial–economic crisis on sustainability
transitions: Financial investment, governance and public discourse. Environmental
Innovation and Societal Transitions, 6, pp.67-95.
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major hit by global financial crisis. Thus, commission was asked to consider structural and
associated non-structural changes in the banking industry of UK in order to encourage stability
as well as competition at marketplace. Along with this, wanted to make recommendations by
governing bodies at the end of September, 2011 17.
Recent regulations of UK financial system
According to Bob Penn, Allen & Ovey, initial origin of legislation which governs the
regulation of Banking and financial services in UK is “Financial Services and Markets Act 2000
(FSMA)”. Basically, recent legal norms derives majorly from FSMA and this was also
influenced by several European laws which sets minimum requirements for regulations of Banks
as well as services of Banking in European Economic Area (EEA). However, maximizing
proportion of frameworks is incorporated by European regulations as it directly influences the
UK. For example; in specific regulations such as (EU) 575/2013 on prudential need for credit
associations as well as investment organizations (Capital Requirements Regulations, CRR)
simultaneously with Directive 2013/36/EU on capital requirements (Capital Requirements
Directive IV), that implement Basel III 18. These are foremost primary origins for capital, funds,
liquidity and leverage requisite in EEA. Instead of all these norms, rules and regulations; there
are some other EU regulations are also framed by legitimate bodies for banking are –
 Regulation (EU) 596/2014 which was based on market abuse (Market Abuse
Regulations).
 Directive (EU) 2015/2366 relies on payment services in intrinsic market.
 Norms on (EU) 648/2012 for OTC derivatives, counterparties and trade repositories of
central (European Market Infrastructure Regulation, EMIR).
 Directives (EU) 2015/2365 which is designed for transparency of Securities financial
transactions as well as reuse and amendment of rules (EU) 648/2012 (Securities
Financing Transactions regulations).
Rules and regulations of Banks in UK marketplace was undertaken into three main regulators
such as-
17 Wilmarth Jr, A.E., 2010. The Dodd-Frank act's expansion of state authority to protect
consumers of financial services. J. Corp. L., 36, p.893.
18 Ennew, C., Waite, N. and Waite, R., 2013. Financial services marketing: An
international guide to principles and practice. Routledge.
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