by Barnaby Meins

Created on: May 06, 2010

The economy of Britain is considered to be one of the world’s most globalised countries with London standing tall as one of the major financial centres in the world. While agriculture and natural resources contribute significantly to the country’s Gross Domestic Production (GDP) at around 11% in total, services which consist of banking, insurance and business services account for the largest proportion at 76%.

In UK, banks are generally classified under two groups: retail banks and wholesale banks. Retail banks refer to banks that focus on consumer banking relationships by offering services such as savings, credit cards and mortgages. Banks in this category include the likes of Barclays and Lloyds. Wholesale banks refer to banks that focus primarily on commercial banking relationships. Services include lending to companies, helping them raise money on the stock markets as well as consultation with regards to merger and acquisition. Other types of banks include building societies which provide services relating to saving accounts and mortgage loans and discount Houses which specialise in lending and borrowing for short periods of time.

In early 2007, the financial crisis that had engulfed America began to spread its wings across the world. The first institution to be hit in UK was Northern Rock which was hit by a subsequent bank run as it woes mounted. As banks that were whipped into the frenzy began to tighten their lending, Bank of England (BOE)  was forced to inject £10 billion into the money markets to bring inter-banking interest rate down in mid-September 2007. The troubles at Northern Rock did not end and it was decided by the government that it would be nationalized in early 2008. The financial market was still experiencing a period of liquidity woes as lending between financial institutions faltered. Hence in April 2008, BOE unveiled a £50 billion plan to ease the pressure on the UK banking system by allowing distressed firms to swap potentially risky mortgage debts for secure government bonds. Another £400 billion mega-bailout plan was unveiled in October 2008 to shore up the ailing banking system. However, UK was at this point on the brink of recession as the economy shrank for the first time in 16 years. In January 2009, BOE had lowered interest rate to 1.5% - the lowest ever in its 315 year history - and UK had officially entered into a recession.

Northern Rock began its sub-prime lending activity in 2006 with

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