The Sub-Prime Crisis, the Credit Crunch, and Bank “Failure”: An Assessment of the U.K. Authorities’ Response

On 8 October 2008 the U.K. government announced a far-reaching plan to restore financial stability, protect depositors, and reinvigorate the flow of credit to businesses and individuals in the U.K. The £400 billion bailout plan embraced three elements: a massive expansion in emergency liquidity support from the Bank of England; recapitalization of U.K. banks and building societies using taxpayers’ money; and the provision of a government guarantee of new short- and medium-term debt issuance made by U.K.-incorporated banks and building societies. This action proved necessary in the wake of continuing and substantial weaknesses in many banks’ share prices despite the temporary ban on short-selling imposed by the Financial Services Authority. It followed two revisions to domestic deposit protection arrangements, and the adoption of a piecemeal approach to failure resolution that saw the eventual nationalization of Northern Rock in February 2008, the nationalization of Bradford and Bingley in September 2008, and the brokering of takeover-rescues of Alliance and Leicester and HBOS by Banco Santander and Lloyds TSB, respectively, in July and September 2008, of the Cheshire and Derbyshire Building Societies by the Nationwide Building Society in September 2008, and of the Dunfermline Building Society by the Nationwide in March 2009. This metamorphosis in approach to failure resolution by the U.K. authorities in response to the sub-prime crisis and the credit crunch—nationalization by default to (part) nationalization as the preferred course of action, a policy continued under the second comprehensive bank bailout plan of January 2009—is duly analyzed in this article.