Essay Example on Secondary Banking Crisis of 1973-1975

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Secondary Banking Crisis of 1973 1975 A financial crisis is any of a broad form of things within which some financial assets suddenly lose an oversized a part of their par value within the nineteenth and early twentieth centuries several money crises were associated with banking panics and many recessions coincided with these panics different things that are typically known as money crises include stock market crashes and the bursting of different financial bubbles currency crisis and sovereign default money crises directly lead to a loss of paper wealth The secondary banking crisis of 1973 75 was a dramatic crash in British property prices that caused dozens of small secondary lending banks to be threatened with bankruptcy The secondary banks just like the larger establishments had been lending heavily supported by previous rising housing costs of the late 1960's and early 1970 s borrowing in excess to carry the loan assets the increase in housing costs was the impact of British post war The secondary banks were competitive against the prestigious and heavily regulated clearing banks that were more and more subject to government imposed ceilings on their lending 



These impositions helped the government restrain consumer demand and protect the balance of payments in an era of full employment and consequent high aggregate demand The clearing banks lost market share to the secondary banks throughout the 60s and this was one amongst the motivations for the overhaul of financial policy in 1971 once the competition and credit control financial policy removed quantitative controls on bank loaning hopefully levelling the taking part in field for the better capitalised clearing banks to out compete the secondary banks An unforeseen downswing in housing market costs and hikes in interest rates well before the Nov 1973 oil crisis left the smaller establishments holding several loans secured by property with lower worth than the loans The Bank of England conducted negotiations that bailed out thirty of the smaller banks and intervened to help some thirty others whereas all the banks were left ready to pay depositors the Bank of England lost an estimated 100 million


The Conservatives came back to power in June 1970 committed to injecting competition into the economy partially as a prelude to membership of the EEC European Economic Community Three specific measures breathed gas into a property boom that had been current since 1968 First the Heath government abolished the Land Commission set up by the previous Labour government The Conservatives argued that the Commission with its powers of mandatory purchase and levies on development had no place in a very free society Second and in accordance with another declaration pledge Chancellor Anthony Barber created interest payments higher than 35 tax deductible for people Senior Treasury officers warned against this within the strongest terms predicting an outsized increase in bank lending for consumer spending significantly for the best rate taxpayers for whom the value of pairing a loan was instantly reduced by 90 The third and most vital issue was Heath s dash for growth Heath s dash for growth In December 1971 the economy entered a stall and unemployment was about to reach one million mark for the first time since 1930s the Prime Minister called a meeting of ministers civil servants and businessmen At this meeting Heath inclined himself towards the Civil Service s suggestion that we ought to think big and build up our industry on a large scale this could mean a lot of public spending We must ask the corporations what they required in terms of monetary and alternative facilities and provides it to them The result was the dash for growth launched in March 1972 Budget when the Chancellor estimated 2 GDP in the economy with tax cuts and better public spending The aim was to attain gross domestic product growth of 5 each year over following 2 years roughly double Britain's long average Heath hoped that loose monetary and fiscal policy would stimulate industrial investment increase output and generate productivity growth 


However as Treasury economic expert Michael Posner identified British people economy was defined by consumer horses that couldn t be reined in by high interest rates and investment horses that can be led to water however not made to drink Heath wished for sustainable industrial growth he ended up with unsustainable client and property boom Lending to the property sector went up by more than eight fold from 1970 74 with the secondary banks overtaking the clearing banks as the principal lenders Residential costs doubled and commercial costs trebled In 1971 the competition and credit control policy had taken was supposed to help the clearing banks by removing impositions but the secondary banks were the ones that were being helped more by this liberal approach Heath had been aiming for 5 gross domestic product growth in 1972 73 incidentally he got 7 2 But the economy was now inflating reached its peak of 25 in 1975 the govt referred to as time on its boom with a tight mini Budget in December 1973 raised the benchmark growth rate to 13 and re imposed curbs on loaning With higher finance prices detonating the property bubble variety of developers and their secondary bank lenders found themselves embarrassed The Bank of European nation initial taught the banks to curb their property loaning in August 1972 and commercial rents were frozen 3 months later with the introduction of statutory costs and incomes policy These measures had very little immediate impact with property loaning rising considerably a lot of within the year even with the steerage than it didn t have the year before However with finance more and more laborious to get when an additional request for restraint from the Governor of the Bank in September 1973 even at the higher rates and property costs falling sharply the secondary banks found their liquidity drying up

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