2. Bank of England reply to the BNC!

I'm Alex Dunn, Senior Supervisor in the Prudential Regulation Authority. I work in the part of the Bank of England which is responsible for making sure that banks and other financial firms are safe and sound.

Alex Dunn Bank of England

Q) Hello, my question is why/what made the financial crisis start in the first place?
From exhilarated_globe at Bruche Primary School

A) The 2008 crash was the biggest financial crisis in almost a century – it pushed the world’s financial system towards the edge of collapse. In September 2008, Lehman Brothers – a bank based on Wall Street in New York - filed for bankruptcy, which basically means it ran out of money and had to close down. Its collapse shook confidence in the banking system all over the world. This is the moment when most people consider the financial crisis began.

A lot of the problems which led to the financial crisis began in the housing market. Normally banks ask lots of questions of people before giving them a big loan (known as a mortgage) to buy a house. They carry out these checks to make sure the borrowers can afford to pay the mortgage – which could be worth hundreds of thousands of pounds – back over many years. However, during the period running up to the financial crisis, these checks were often not carried out as thoroughly. This meant some people borrowed more money than they might otherwise have been able to, and in some cases more than they could really afford to pay back.

Problems began when the interest rates on these loans started to rise, which made them more expensive to repay. Some people then defaulted on their loans, which means they stopped paying them back. Worries about these loans increased even more when house prices began to fall, meaning the house was now worth less than the value of the mortgage that the owner still had to pay back. This led to lots of concerns among banks about the losses they might make as more people defaulted and house prices fell further.

This wasn’t just happening in America. In the years leading up to the financial crisis, the British bank Northern Rock had grown very quickly. Like other banks, it had made lots of loans to people so they could buy houses. It paid for these by borrowing money from other banks and financial markets. When the financial crisis began it became much more difficult for Northern Rock to borrow money. This really worried people who had savings in the bank, and many queued outside its branches as they tried to withdraw their money. This is known as a ‘bank run’ and made its money problems even worse. Eventually the government had to step in and take it over.

I'm Emma Sinclair. I work in the area responsible for the design, production and distribution of our banknotes and my job title is 'Senior Manager, Banknote Engagement and Communications'.

Emma Sinclair Bank of England

Q) Was it allowed for the Royal Mint to provide banks with cash or was it just an idea that had not yet been thought of?
From adventurous_painting at Ravenscroft Primary School

Great question adventurous_painting. I work in the banknotes department at the Bank of England so I thought I would get back to you about this.

First of all, the Royal Mint is actually only responsible for coins. It is the Bank of England that is responsible for banknotes. We have been printing banknotes for over 300 years and work hard to make sure that our notes are easily recognisable but very difficult to copy. If you look at a banknote next time you have one, if it is one of ours you will see it says ‘Bank of England’ across the top and even has a picture of the Bank’s main building next to the Queen’s portrait – that building is where I’m writing to you from now.

Currently, there are around 3.6 billion Bank of England banknotes in circulation worth about £70 billion. Every year, we decide how many banknotes to print. But, importantly, we do this by looking at what the demand is for banknotes. So we only print notes if people want them. One very important factor in this is how much the economy is growing. If more people have a job or the people who have jobs are being paid more they are likely to want more banknotes. This way the amount of banknotes in the economy grows in-line with the size of the economy.

If we were to print more money (to give to banks who are struggling for example) when the economy was not growing we would be increasing the amount of money in the economy without increasing the amount of products in the economy. This would be very likely to make prices go up.

In some countries they have tried to print more money to pay off debt, but this has had very bad consequences. For example, in 2006 the central bank of Zimbabwe in southern Africa printed more money to pay off the government’s debts. As a result, prices rocketed. At one point prices were almost doubling every single day. So if a loaf of bread cost £1 on Monday it would cost £64 by Sunday. As people’s pay was rising nowhere nearly as quickly this made life very hard for a lot of people in Zimbabwe and many people are still struggling today.

One of the main jobs of the Bank of England is to stop prices rising too quickly (or too slowly) so we definitely wouldn’t want the same thing to happen here.

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