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We've all heard about the credit crunch - but exactly how did it come about?
Guide To Credit Crunch | Business | Sky News
Well its roots can be traced back to the US a few years ago. People with poor credit ratings were lent money to buy homes, even though they may not be able to pay it back. They were called sub-prime mortgages.
The lenders found it easy to raise the funds. They bundled up tens of thousands of loans in a "collateralised debt obligation" or CDO.
The CDO was then sold to another bank which paid cash. That bank would then receive regular payments from the borrowers in the bundle.
Banks then traded CDOs with each other in return for cash - either by selling CDOs outright or by using them as collateral to borrow funds.
Things worked fine until the US housing market bubble burst in the summer of 2007. Millions of people were falling behind with their mortgage payments and the value of their property was going down. Many homes were repossessed.
The problem for holders of CDOs was that they did not know whether the mortgages in the bundle were "good" or "bad". As a result, the value plunged to almost zero as nobody wanted to buy them. But the banks still had loans to repay.
Banks started getting nervous about lending to each other and then they increased the interest rate they charged for it. Banks like Northern Rock found it difficult to get cash and this led to nervous savers pulling their money out. There was a run on the bank and it was then nationalised.
Fears about exposure to bad mortage debt also led to Halifax Bank of Scotland being taken over by its smaller rival Lloyds-TSB.
Panic on the world markets led to US Treasury Secretary Henry Paulson stepping in. He said the government would buy up hundreds of billions of dollars of bad debt to restore confidence and get banks lending to one another again.
Guide To Credit Crunch | Business | Sky News
Well its roots can be traced back to the US a few years ago. People with poor credit ratings were lent money to buy homes, even though they may not be able to pay it back. They were called sub-prime mortgages.
The lenders found it easy to raise the funds. They bundled up tens of thousands of loans in a "collateralised debt obligation" or CDO.
The CDO was then sold to another bank which paid cash. That bank would then receive regular payments from the borrowers in the bundle.
Banks then traded CDOs with each other in return for cash - either by selling CDOs outright or by using them as collateral to borrow funds.
Things worked fine until the US housing market bubble burst in the summer of 2007. Millions of people were falling behind with their mortgage payments and the value of their property was going down. Many homes were repossessed.
The problem for holders of CDOs was that they did not know whether the mortgages in the bundle were "good" or "bad". As a result, the value plunged to almost zero as nobody wanted to buy them. But the banks still had loans to repay.
Banks started getting nervous about lending to each other and then they increased the interest rate they charged for it. Banks like Northern Rock found it difficult to get cash and this led to nervous savers pulling their money out. There was a run on the bank and it was then nationalised.
Fears about exposure to bad mortage debt also led to Halifax Bank of Scotland being taken over by its smaller rival Lloyds-TSB.
Panic on the world markets led to US Treasury Secretary Henry Paulson stepping in. He said the government would buy up hundreds of billions of dollars of bad debt to restore confidence and get banks lending to one another again.