What can Governments Learn from the Subprime Credit Crunch Banking Crisis

In the good times, when the economy was rosy, there were repeated calls for the government to do something about the obscene’ amounts of profit that banks were making. Suddenly, however, the tables are turned with media pundits speculating on how much loss banks will have to write off due to the deterioration of the economy and predicted losses from instances where loan holders default on payments.

In the UK, a fallout of the current banking crisis is that the UK government has found itself having to (temporarily at least) nationalise the stricken Northern Rock bank. For those who aren’t aware, Northern Rock got into trouble during 2007, leading to a run on the bank as panicked customers queued to remove their money from the bank. The government found itself having to step in to prevent the panic from leading to the total collapse of the bank.

In the US meanwhile, the US government too has had to dig deep in its pockets to support its banks and try to shore up the sub prime problems that have engulfed so many US banks. Indeed, the US has been the epicentre of the current world banking crisis with the rest of the world’s banking markets being marked down even though their sub prime exposure seems for the most part to be less than their US counterparts.

I think the main thing that this should teach the world governments is not to just assume that their banks are these never-ending profit making machines. Rather than being seen as public enemy number one, they need to realise that the ongoing success of the banks is crucial to the whole economy’s health. When banks get into difficulties, it is usually a sure sign that a recession is underway and recessions can often cause a government to be ousted.

The other thing that I think we can expect governments to look at is the banks’ lending practices, especially in relation to complicated packaging of loans by investment banks. A report on www.reuters.co.uk stated that the UK government was considering further regulation in relation to complex products’. I think we can expect that lending practices will be tightened and that credit will no longer be so freely available. However, regulation where introduced needs to be done so carefully. The UK government, in recent years, has been very fond of regulation but they need to be aware that it’s costly for banks to implement and, now more than ever, they should have an appreciation of the importance of ensuring that their banks remain financially healthy.