Key Events

See how the credit crunch unfolded, with all the major events explained. A timeline of the big financial news stories, from boom times to bank runs, and from government rescues to rate cuts.

Boomtime: the seeds are sown

The low interest rate environment encourages institutional investors (investment banks, hedge funds, money market funds etc.) to seek higher return investments. They increase their lending to banks, and the high competition this fuels makes borrowing cheaper to bank customers. In turn that sparks a house price bubble and an increase in companies leverage (their dependence on debt).

The increased availability of funding for banks, together with low perceived levels of risk due to the strong economy result in a sharp increase in lending to more risky customers, such as high loan-to-value mortgages. The increase in risk was largest in the US, encouraged by the banking model in which many loans are sold by the banks to other investors around the world after origination, through securitisation. The 'sub-prime' mortgage market expanded particularly rapidly, with borrowers attracted by the very low interest rates following the 2001-2 US recession.

Higher US interest rates

A problem began to emerge in 2006 when US interest rates rose and sub-prime mortgage borrowers began to default on their loans. Financial institutions holding the bonds backed by the loans began to suffer losses to a much higher degree than expected. The resulting uncertainty over the correct valuation for these bonds causes a hiatus in their trading, so their prices fall very sharply. Accounting regulations require banks to recognise the decline in valuations in their profits, resulting in sudden sharp losses.

Bear Stearns, a US investment bank, has to file for bankruptcy on 31st July 2007, for two of its hedge funds which were closely to the US housing market. The idea that funds might collapse has many analysts worried.

Credit crunch hits Europe

Although its effects are already being felt in America, now the damaging symptoms of the credit crunch suddenly become high profile in Europe.

French bank BNP Paribas tells investors they will not be able to take money out of two of its funds because it cannot value the assets in them, owing to a "complete evaporation of liquidity" in the market. It's a clear sign that business between banks is becoming restricted.

German bank IKB also has to be bailed out in August due to bad losses in the sub-prime meltdown.

Fear of the implication of these events triggers a sharp rise in the cost of inter-bank borrowing (libor) and alerts the financial world to the fact that there could be serious trouble around the corner.

Run on Northern Rock

News leaks that Northern Rock is in financial trouble due to increased borrowing costs in the financial markets and queues start forming outside branches up and down the country as fearful depositors begin withdrawing their money. In a just a few days, over £1bn is removed in what is the biggest run on a British bank for more than a century. It tries to find a buyer, but fails, and rather than see the bank go under, the government steps in with a rescue plan. However, the crisis is only truly ended when Chancellor Alistair Darling announces a guarantee on all Northern Rock savings.

First base rate cut

With signs that the economy is slowing, the Bank of England (BoE) cuts interest rates by 0.25%, from 5.75% to 5.5%. It's the first cut in three years. And even in 2005 it was only reduced once – with the previous cut to that being in 2003.

Two weeks later the BoE makes £10 billion available in loans to UK banks in an effort to improve their liquidity, reduce solvency concerns and reduce the likelihood of a credit crunch. Meanwhile, many banks and building societies withdraw the 100 per cent mortgages that have almost become symbolic of the boom times.

House prices drop

Confidence in the UK housing market falls to its lowest point in 30 years. It becomes clear that the peak of the house price boom was at the end of 2007. The value of some homes has already tumbled by as much as 10% between then and April 2008.

Stamp duty exemption

In response to falling house prices, the government looks to give the housing market a boost by exempting around half a million properties from stamp duty for a year.

Properties costing less than £175,000 will be taken out of the stamp duty bracket - moving the lower limit up from £125,000. This can save purchasers, most likely to be first time buyers, up to £1,750.

The average UK property costs £164,000 this month, and at present buyers paying between £125,000 and £250,000 for a home have to pay 1% of the price in tax.

Historic US mortgage bailout

Two large American mortgage-lending companies, Fannie Mae and Freddie Mac, are rescued by the US government in one of the largest bailouts in US history. The companies had been unable to roll over regular refinancing to fund their portfolios of mortgage-backed bonds due to concerns of potential losses during the US housing market collapse.

Meanwhile in the UK, Nationwide announces a takeover of the Derbyshire and Cheshire Building Societies to provide more secure funding and safeguard their depositors.

Large US banks go bust

At 5.30am Lehman Brothers, America's fourth-largest US investment bank files for bankruptcy protection. At 7am, 4,500 Lehman staff at its Canary Wharf HQ are told they're out of a job.

On the same day, Bank of America saves Merrill Lynch, another huge American bank, with a $50 billion takeover.

Commentators say that this is Wall Street's most extraordinary 24 hours since the late 1920s.

Risk premiums on banks' debt rockets, as solvency concerns are raised further, increasing funding difficulties for vulnerable banks.

Lloyds TSB propose acquisition of HBOS

Lloyds TSB announces a £12.2bn proposed acquisition of Halifax Bank of Scotland (HBOS), which was struggling to fund itself in financial markets.

Government rescues Bradford & Bingley

The government takes part-ownership of Bradford £ Bingley (B£B) to save it from going bust. Part of the blame for its problems is laid at the door of buy-to-let (BTL) mortgages. It is alleged that B£B was the easiest place to get a BTL mortgage during the housing boom.

Meanwhile, trouble is brewing in Iceland as the government takes control of the country's third-largest bank, Glitnir.

Savings guarantee increased

To help restore confidence in UK banks, and to help prevent any more banks runs, the Financial Services Authority (FSA) raises the limit to the amounts of deposits guaranteed if a bank goes bust. It goes up from £35,000 to £50,000 - which protects 98% of all UK savers.

Meanwhile in the US, the government announces a $700bn plan to rescue the US financial sector.

Icesave deposits frozen

The Icelandic government takes control of Landsbanki, the country's second largest bank, which owns Icesave in the UK. As it had such high interest rates, millions of pounds of savings were deposited there by a third of a million ordinary British people as well as large British organisations and even councils.

There is widespread anxiety as all savings are suddenly frozen and become inaccessible. Fortunately the FSA's recent announcement that it will guarantee up to £50,000 for every saver helps allay some fears. Over the following weeks most Icesavers are eventually able to withdraw their savings or receive the equivalent in compensation.

Government banking investment

In one day, several historic events take place. The government announces a £500 billion rescue package for the banking system - mainly increased liquidity measures from the Bank of England and loan guarantees; and the government negotiates a £50bn increase in capital for the main UK banks, of which £37bn is offered by the government, making it a majority shareholder in the Royal Bank of Scotland and a minority shareholder of Lloyds TSB and HBOS.

Interest rates are cut by 0.5% - the largest single reduction since 2001. All of the rate changes in the interim had been in increments of only 0.25%.

Large rate cut

The base rate is cut by 1.5% leaving it at only 3%. This is good news for millions of homeowners. It means monthly payments for tracker mortgages drop by 1.5%. So on a £200,000 mortgage, these people pay an impressive £150 less each month.

It's good news for many on standard variable rate mortgages too. Many banks, including Lloyds TSB, pass on the full 1.5% cut so that these homeowners save just as much as those on tracker mortgages.

Lowest rate for 57 years

With still no signs of stabilisation in the economy, the Bank of England takes further action. It takes the base rate down by 1%, so that it now stands at 2% - the lowest level for over a half a century.

However, the libor rate (the rate that banks can borrow at in the money markets) remains high, meaning some banks can't pass on the full base rate cut to borrowers. Some banks also withold the full cut to protect their savers. They say cutting the rate for borrowing too much would mean having to cut savers' interest rates, which would be unfair.

Lowest rate since 1694

The Bank of England further reduces base rate to 1.5%, the lowest since the Bank was founded in 1694

Dramatic fall in bank share prices

The jittery mood in the financial markets remains. Bank shares take another serious hit and all major banks see dramatic falls in their share price. In the UK, Barclays is hit worst, seeing a 25% drop in its share price, while Royal Bank of Scotland closes 13% lower. Doubts over the stability of the major financial institutions sweep the markets.

Events in the US further add to this nervousness - the latest US government rescue indicates that efforts to stabilise the US financial sector are failing to take effect. In the UK plans for a new government bail-out package emerge but uncertainty over the format and effectiveness of this plan lead to a further drop in confidence in the financial markets.

Creation of Lloyds Banking Group

The successful acquisition of HBOS plc. by Lloyds TSB Group plc. is announced, which means Lloyds TSB and HBOS are now under one new Group name, Lloyds Banking Group plc.

Lloyds Banking Group becomes the largest retail bank in the UK, bringing together the shared knowledge, strength and expertise of a number of well recognised brands, including Lloyds TSB, Halifax, Bank of Scotland, C&G, Scottish Widows, Clerical Medical and Birmingham Midshires.

The new Group has over 30 million customers and the largest branch and fee-free ATM network in the UK.

New government bail-out package

With the economy continuing to decline the government announces plans for further support to reinforce the stability of the UK financial system. The aim of the latest government bail-out package is to increase confidence and allow UK lenders to increase their lending capacity.

The government offers to insure bad debts to encourage lending and the Credit Guarantee Scheme is extended to include mortgage debts. £50billion is made available through the Bank of England to buy assets from private sector companies to increase liquidity.

These plans build on previous government measures to support the economy through the financial downturn and rescue the falling housing market.

UK economy officially goes into recession

In economic terms, a recession is technically defined as 'two consecutive quarters of negative economic growth' and today marks the point when the UK passes this milestone. The Office of National Statistics reports a 1.5% drop in gross domestic product, the steepest quarterly decline the UK has experienced since 1980. The pound is at a 23-year low compared to the dollar and the FTSE index drops below the 4000 mark.

Lowest base rate in history

Another 0.5% is chopped off the base rate, taking it to 1% - the lowest rate in the Bank of England’s history. The figure has plummeted in a matter of months, from 5% in early October 2008.

Historic US economy recovery package

President Obama calls it "the most sweeping economic recovery package in our history" as he signs the American Recovery and Reinvestment Act 2009. It gives the green light to public spending of $787bn to stimulate the economy, including $288bn-worth of tax cuts and credits. In a separate move, Obama states that he will follow this up with at least $50bn in aid for millions of homeowners struggling to meet mortgage payments.

Base rate sets new record

The base lending rate is halved, from 1% to 0.5%. This sets yet another all-time record low, having already become the lowest ever rate in January 2009. House prices continue to fall, with a 2.3% drop in February. The average UK home was worth £160,327 - and year-on-year, the cost of the average home was 17.8% lower last month than in February 2008.

G-20 London Summit

Collectively, the G-20 (a group of twenty Finance Ministers and Central Bank Governors) economies comprise 85% of global gross national product, 80% of world trade and two-thirds of the world population. Officially called the G-20 Leaders' Summit on Financial Markets and the World Economy. the London Summit was attended by heads of government plus heads of state from the G-20, plus some regional and international organisations. Top of the agenda was tackling the global economic downturn. After the summit, Barack Obama said that the G-20 leaders had agreed "unprecedented steps to restore growth and prevent a crisis like this from happening again". They pledged $1.1 trillion (£681bn) to tackle the crisis, including $750bn to the International Monetary Fund, $250bn to boost global trade and $100bn for international development banks to lend to the poorest countries. Leaders also agreed to introduce tougher financial regulations and sanctions against secretive tax havens.

A budget for the recession

This budget, coming as it does in the middle of a recession, is even more important than usual. It not only gives the full picture of the state of the British economy, but also launches new policies aimed at tackling the downturn. The verdict isn't good: the level of borrowing over the next four years will take the UK to it's largest levels of debt since the Second World War. Public borrowing is to increase to £175bn this year; then for the following years, will be £173bn, £140bn, £118bn and £97bn. The Government predicts the economy to shrink by 3.5% in 2009, then grow by 1.25% in 2010, and grow by 3.5% annually from 2011. To raise money for the public coffers, income tax for those earning more than £150,000 is to rise (by 5%) to 50% from April 2010. To stimulate the recession-struck car industry, from next month, and until March 2010, motorists can get £2,000 discount on new cars if they trade in cars older than 10 years. There are many other Government measures to help fight the economic troubles, from increases in tax on cigarettes and petrol to projects that improve employment levels. The green industry receives considerable funding too.

Lowest inflation rate ever

One of the main measures of inflation, the Retail Prices Index (RPI) falls from -1.6% from -1.1%, the lowest level since records began in 1948. The RPI is dropping because it includes mortgage interest payments and housing costs, as well as meat, milk and fruit prices - which all fell last month. The Bank of England is aiming to keep inflation at 2% to maintain price stability because this in turn supports economic stability. When prices drop, people don't buy as much because if they wait, they might get it for less. This is bad for economic growth.

The worst recession in 50 years

Hopes of a quick end to the recession take a blow as disastrous figures show that the economy is shrinking at its fastest rate on record. Britain's GDP dropped by 0.8% between April and June, less than the 2.4% slump in the first quarter, but a far bigger contraction than forecast by City economists and the Government. A majority of experts had predicted a fall of 0.3 or 0.4%. Being the fifth consecutive quarter of recession, it matches the length of the early-Eighties and early-Nineties slumps. The economy has now shrunk by 5.6% in a year, the steepest fall since official quarterly records began in 1958 and the worst decline since the Great Depression, according to experts.