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.

Comments (15)

  • Arnhem-Wharf-logo-250x250.jpg happy_guava | Arnhem Wharf Primary School
    22 Nov 2018

    Can you set stricter rules like the bankers bosses setting stricter rules to make the individual bankers lend money to people who they trust?

  • Ask the expert.jpg EXPERT: Alex and Emma Bank of England
    26 Nov 2018

    Hi happy_guava, that's a really good suggestion. Since the financial crisis the Bank of England has made stricter rules on who banks can lend to, including more tests to see if someone borrowing money can afford to pay the money back. Your suggestion that banks use how much they trust someone is an interesting idea because it makes us think about what trust is. Normally we say we trust someone when we know them well, but banks can’t know all of us well. So they often look at other ways of measuring trust – like what is someone’s history of repaying money they have borrowed before. But are there better ways to measure trust?
    And if banks get very strict about who they lend money to who might lose out from that? Would there be some people who couldn’t lend money anymore? How would they feel about that and is it worth it if it makes banks safer?

  • St-Edwards-logo-250x250.jpg congenial_theory | St Edward's Catholic Primary School
    28 Nov 2018

    I have a question. Why do we have money.

    1. St-Josephs-Northfleet-logo-250x250.jpg ingenious_tamarillo | St Joseph's Catholic Primary School, Northfleet
      congenial_theory's comment 29 Nov 2018

      We have money because if we did not have money then stealing wouldn't really be stealing because it has no value and that house will become more vulnerable because people will take thing that they like and world will be chaos.

    2. St-Josephs-Northfleet-logo-250x250.jpg energetic_conversation | St Joseph's Catholic Primary School, Northfleet
      congenial_theory's comment 29 Nov 2018

      We have money so that, instead of just trading, we receive money for giving away and then we can CHOOSE what we buy. Then we aren't forced to trade for something that we might not what want but still would benefit us.

  • Boutcher-logo-250x250.jpg content_lemon | Boutcher C of E Primary School A | United Kingdom
    29 Nov 2018

    How do you know when a financial crisis is about to start? Are there any signs or some sort of graphs that show you?

  • Michael-Faraday-logo-250x250.jpg cheerful_leaves | Michael Faraday School | United Kingdom
    29 Nov 2018

    What can be done to ensure taxpayers do not end up footing big pay packets for bankers?

  • St-Barnabas-logo-250x250.jpg gentle_parrot | St Barnabas C of E Primary School
    07 Dec 2018

    Do banks have good rules because if they didn't the financial crisis will happen again and we don't want that, because we would lose our houses and we took peoples money and you might not pay them back , its like a circle that goes round and round but it would finally stop.

    If you take money from the bank that dosn't belong to you , you would now your taking a risk for you and other people.

  • Boutcher-logo-250x250.jpg impartial_panda_bear | Boutcher C of E Primary School A | United Kingdom
    07 Dec 2018

    Hi Alex/Emma, I was wondering if a financial crisis can ever build up over time, and then sides it has a terrible couple of months. I am particularly curious in this category as I would like to know if there are two ways a financial crisis can go. Could there ever be a good financial "crisis" as in a financial situation might turn out better than before?

  • Boutcher-logo-250x250.jpg believable_introduction | Boutcher C of E Primary School A | United Kingdom
    07 Dec 2018

    I was wondering if the financial crisis happened again, and you were the boss, everyone relied on you to stop thing that was happening in the world that involved the Bank of England. What would you do ton stop the finance crisis from happening?

  • Portobello-logo-250x250.jpg productive_petal | Portobello High School
    10 Dec 2018

    Do you think there could be a second financial crisis with Brexit on the way?

  • Portobello-logo-250x250.jpg productive_petal | Portobello High School
    10 Dec 2018

    Do you think there could be a second financial crisis with Brexit on the way?

    1. Bruche-logo-250x250.jpg independent_violin | Bruche Primary School | United Kingdom
      productive_petal's comment 11 Dec 2018

      Maybe,but aren’t the banks trying to stop this ?

  • Richmond-Hill-logo-250x250.jpg tidy_turtle | Richmond Hill Academy | United Kingdom
    14 Dec 2018

    Who would you choose to trust the bankers bosses, the individual bankers , the government or the person who is giving them the money 💵 who would you choose and why?

  • New-Horizons-logo-250x250.jpg genius_duck | New Horizons Children's Academy
    17 Dec 2018

    It start by ☝️ shop in the 🇬🇧 . So if a shop didn’t pay the same money 💴 as the bank did they have to close . And if the other shop did the same thing the bank will have less money 💵 . And it have to close down and it happens to other banks. So that is what happened to the crisis.

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