Impact on Financial Institutions
One of the first victims was Northern Rock, one of the medium-sized British banks. The highly
leveraged nature of its business led the bank to request assistance from the Bank of England. This action led to
investor panic and a bank run in mid-September 2007. Calls to nationalise
the institution were at first ignored; in February 2008, however, the British government (having failed to find
a private sector buyer) changed their mind, and the bank was nationalized. Northern Rock's problems proved to
be an early indication of the troubles that would soon affect other banks and financial institutions.
Initially the companies affected were limited to those directly involved in home construction business and mortgage lending
such as Northern Rock and Countrywide Financial, as they encountered serious problems obtaining financing in the credit markets.
Over 100 mortgage lenders went bankrupt during 2007 and 2008. Concerns that investment bank Bear Stearns could
collapse in March 2008 resulted in its fire-sale to JP Morgan Chase. The crisis hit its peak in September and
October 2008. Several major institutions either failed, were acquired, or were taken over by the
government. These included Fannie Mae, Freddie Mac, Lehman Brothers, Merrill Lynch, and AIG.
Leaders of the Bank of England have called for fundamental international banking reform. Bank of England deputy governor Sir John Gieve said the “fundamental rethink” meant increasing capital and liquidity requirements at institutions with “strong restraints on the build up of risk.” Some of the ideas considered are quite significant, such as increasing the requirements for the banks reserves. (Fractional reserve banking often allows banks to have small reserves against which loans can then be made out for larger amounts as usually most people do not withdraw their cash deposits at the same time. This works well in good times, but can then lead to a crisis through encouraging more loans which get riskier as competition increases; a moral hazard in reverse.)