Credit crunch: have the rules of financial management been broken?

David Moxon

    Research output: Working paper

    Abstract

    With the questions being asked about the sustainability of banking in the UK and the after effects of exposure to toxic assets in the US the effects of global liquidity and profitability of UK banks is considered. The big question is how has this affected shareholder value, measured by the share price, for investors in the UK banks. Secondly, as UK banks? have faltered, is worth considering whether pricing efficiency of the true economic value of bank shares has been under mind by recent events such as the practice known as short selling. The debate looks at an abstract of what savers and borrowers look for in a scenario without banks. If we then revert back to basics to understand that banks act as brokers and create the ability to lend money many times over, through a number of transactions, whilst maintaining liquidity and confidence. This relies on the money being re-deposited within the banking system such that where 800/0.08 i.e. textbackslashpounds1,250 can be lent through a number of transaction. This lending and re-depositing within the UK banking system worked with a zero funding gap up until 2001 but since then the international scale of banking meant that the Bank of England reported that for 2007 there was a net deficit of textbackslashpounds625billion between the amount of actual savings and borrowers (Source BBC website - Robert Preston 2nd October 2008). The debate is whether this deficit in the UK is now a surplus in another country overseas or is it a case that the UK Banks have allowed their liquidity to fall by underwriting unprofitable lending. To understand this we have to explore the securitisation process and in turn how this can expand a banks? balance sheet but has also been used to ease liquidity on a global scale, with consequences that are now only becoming understood.
    Original languageEnglish
    Publication statusPublished - 1 May 2009

    Publication series

    NameSouthampton Solent University Faculty of Business, Sport and Enterprise Research and Enterprise Working Paper Series
    No.Number VI

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