Cost To Rescue British Financial Institution

Submitted By vertuna
Words: 2016
Pages: 9

£850bn: cost to rescue British financial institution


This paper will begin with a brief background of the topic. In 2007---2008, the United States Suffered a severe “financial tsunami”,many of the largest financial institutions like “Lehman Brothers Holdings Inc.” have collapsed or been bought, And because of the connectivity of the global financial institutions, this “tsunami “quickly swept over the whole world, caused a broad impact on the global economy, world financial markets proceed the credit crisis. In that situation, governments announced that they would give bailout for some financial institutions to rescue the finance recession. According to Anup Shah, the U.S. government had spent $9.7 trillion on this bailout plan. (2009)Similarly, the support for British banks has cost the taxpayers’ money already reached £850 billion so far, according to figures from the National Audit Office (2009). This is an unprecedented amount, its equivalent to for every man; woman and child in Britain paid £35,000 for this bailout. Accordingly, some critics question this huge amount, and if it is worth to put so much taxpayer’ money betting to rescue financial institutions. Confronted with these queries, The Treasury assert that bank is indispensable to modern society; furthermore these funds are used to ensure social stability and restore the credit of financial system so the use of it is reasonable. (The National Audit Office, 2009).

In this paper, four sections will follow the introduction. The Section one will be a description of the basic functions of finance. In the next section, details on discusses and judgment of the role of financial institutions in British, besides, argues for its value. Further research on if the allowance played a positive role for the economic crisis will illustrate in later section. The last one is to analyse the £850bn, in addition, discuss some common doubts for it. The major goal of this paper is to explore the rationality of with such huge money from taxpayer to rescue the financial institutions.

Functions of finance

“It is difficult to imagine the scale of the consequences for the economy and society if major banks had been allowed to collapse.” (Amyas Morse, 2009) This sentence shows the office to describe major bank in a significant position, it will cause turmoil in the market accompany by its collapse. Whereas, what the reasons that National office to see financial institution such important, to known this, the basic function of the financial institution should be understood first. According to R. Merton and Z. Bodie (1996:110), the basic function of the financial institution should be stable, because function with time and the regional rarely changes; from the most general sense, the financial system is mainly providing the following 6 functions:

(1) The liquidation and payment function, namely the financial system provides methods of payment for convenient trade goods, services and assets;

(2) The equity financing and refined functions, namely the financial system by providing mechanism, to collect the capital and orientated to large-scale investment projects;

(3) Afford channels for the transfer of economic resources over space and time, namely the financial system provides the economic resources to across time, regional and industrial transfer method and mechanism;

(4) The risk management functions, namely the financial system provides the means to deal with the unexpected situation and control risk;

(5) Provide information function, namely the financial system through the offer price signals; help coordinate Non-centralized decision of different economic sectors;

(6) To solve problems of incentive, namely the financial system to solve the incentive problems in financial trade when parties have asymmetric information or principal-agent behaviour;

The role of financial institutions in British

In terms of the financial institution,