The crisis of small banks in the UK

What happened in July in Russia - an analogue of the crisis of small banks in Britain, broke out in the early 1990's. The British banking system can be divided into three parts: a large commercial and merchant banks, small and medium-sized banks, as well as local offices and branches of foreign banks. In 1990 the UK operated 540 banks, of which a group of small and medium-sized banks composed of 125 institutions. Smallest Bank had assets amounting to £ 1 million, but the biggest of the small - at 3.2 billion pounds. For comparison: Barclays, the largest at that time a British bank, had assets of 138.1 billion pounds on.

The crisis of small banks occurred immediately after the economic boom of the late 1980's. Banks are small and medium-sized active in lending on the security of commercial and residential real estate prices to grow rapidly. After the Bank of England tightened monetary policy, real sector of the economy has moved into a phase of recession, and real estate prices fell for the third. Along with decreased growth rate of bank loans, particularly construction loans to cooperatives. Small banks have experienced a double shock. On the one hand, demand for construction loans fell. On the other - construction cooperatives, the largest contributors of banks, reducing the amount of deposits. The group of small banks as a whole depended heavily on the deposits of building cooperatives. The second and third place on the importance of standing loans from foreign banks and deposits from local authorities. The gradual decrease of the small banks from the cooperatives and foreign banks has led to a deterioration in the quality of their assets. The bankruptcy of a major British & Commonwealth Merchant Bank (BCCI) and four small banks in 1990-1991. the beginning of the open phase of the banking crisis. In early July 1991, the banking community has been affected by the decision of the Bank of England closed BCCI on charges of fraud. This news contributed to the seizure of large deposits of small British banks. Over the next three years, a quarter of all small banks closed their doors. 25 of them went bankrupt, while another 20 have disappeared as a result of mergers and acquisitions.

After the start of the open phase of the crisis the Bank of England moved to action. Since mid-1991, under the control of monetary authorities, there were 40 out of 125 small banks (32% of the total). The criterion for selection in the control list is the accessibility of small banks to the wholesale market funding. In a further control was extended to banks, are actively involved in lending to construction. In each case, the Bank of England has requested additional information regarding liquidity and cash flows, as well as plans for further action. The control of monetary authorities for the small banks was the monitoring of their major operations. Many were able to independently get out of difficult situations. They were long-term funding on a market basis from the major banks, switched to the retail sale of banking services, or simply reduce the activity on the basis of the existing liabilities. In addition to monitoring the operations of small banks, the Bank of England liquidity support of several agencies. The decision on the allocation of credits taken, if the monetary authorities felt that the closure of banks destabilized the money market and lead to a crisis of liquidity of other agencies. Bank of England concerned about the stability of the financial system as a whole and managed to prevent the spread of the crisis on the real economy. The actions of monetary authorities have been successful, the crisis of small banks has not led to large-scale systemic crisis.

The provision of additional liquidity to banks occurred with the knowledge of the British Government. However, it did not give the Bank of England is no guarantee. In other words, the central bank bears the risk, and failing all responsibility lozhilas for his leadership. Circumstances in which act the Bank of England, leads the market nature of its operations. In particular, the central bank to receive monetary compensation from the banks, benefiting from its financing. By 1993, the proceeds of the financing of small banks reached a peak of 115 million pounds.