A central bank like the federal reserve in the united states can help banks survive a bank run by8/23/2023 ![]() However, the main, and longest-lasting, monetary policy instrument of the post-crisis period was quantitative easing, which began in the UK in March 2009. It was succeeded by the Funding for Lending scheme, under which the Bank of England provided funds for banks at below-market rates if they increased their lending to domestic borrowers. This scheme was effective in alleviating the banks’ liquidity strains, but it was terminated in 2012. For a period, the Bank of England provided liquidity to the commercial banks by asset swaps, in which they lent liquid Treasury bills to banks in exchange for commercial assets. It was clear that the economy needed more stimulus than low short-term interest rates alone could provide. Banks were unable to lend even to low-risk borrowers as they customarily had done. Moreover, bank regulation had, not surprisingly, been made much more restrictive after the crisis. By early 2009, short-term interest rates had been cut to very low levels, and they have remained very low until the present day.Īt that time, commercial banks were crippled by losses and desperate to raise cash to survive. The Bank of England actually raised short-term interest rates to 5.25% in February 2008, as the financial crisis was developing, and did not make substantial cuts until after Lehman Brothers’ failure had led to a liquidity crisis in global financial markets and the drying-up of bank credit world-wide. The Bank of England also has a secondary monetary policy objective, subordinate to the inflation target, which is to support the government’s economic policy, ‘including its objectives for growth and employment‘. And the average rate of inflation since the end of 2006, just before the crisis, has been 2.2%, so that monetary policy has been pretty successful in achieving its main objective. Since 1992, British monetary policy has been guided by the inflation target, which has been set at 2% since 2003. Gross Domestic Product fell by 0.3% in 2008 and 4.1% in 2009. ![]() For another, the economy was quite highly leveraged and therefore vulnerable to sudden restriction of credit. The British economy suffered particularly badly from the financial crisis. A year later, in September 2008, the crisis entered a much more serious phase when the investment bank Lehman Brothers failed. The first bank run in Britain since the 19 th century created a sense of panic, which had an unmeasurable but surely substantial effect on global financial markets during the following year. The United Kingdom was the scene of the first act of the crisis, namely the run on Northern Rock bank in 2007. The financial crisis of 2007- 2008 brought an end to a long period of economic growth.
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