Readers Question: I still don’t understand why the credit crunch in US caused a credit crunch in UK? is it because banks in UK depend on US banks to borrow money?
UK banks bought toxic US subprime mortgage bonds either directly or indirectly. So their balance sheets suffered when US homeowners defaulted on mortgage repayments. This caused UK banks to try to repair balance sheets by lending less.
In the case of RBS they bought a stake in Amro a Dutch bank with heavy exposure to the US subprime market. Therefore RBS has had to write off a record £28bn and are now facing nationalisation
Also, UK Banks were highly geared – lending a high % of their deposits. They Borrowed on money markets to lend long term mortgages. Therefore when borrowing money on money markets became difficult, many banks struggled to gain enough funds – e.g. Northern Rock.
Falling House prices have exacerbated all problems in banking sector.
More on causes of UK credit crunch