THE GLOBAL FINANCIAL CRISIS AND RBS

Read A, which is about the global financial crisis of 2008 and the experience of one British bank over the following ten years. Some clues to help you fill the gaps are given below.

1. t-k----r (purchase a majority stake) 2. c------ed (closed due to insolvency) 3. r-n (a quick sequence of something) 4. bai---t (rescue from financial disaster) 5. r---y (unsafe; a gamble)

6. l--------n (solving a dispute in court) 7. b------s (local offices; not the HQ) 8. red-----t (no longer needed for work) 9. bo----s (extra payments for hard work) 10. r--e (went up; increased)

(A) In February 2018, the Royal Bank of Scotland (RBS) published its annual results, marking the first time since the 2008 global financial crisis that the bank had declared a distributable profit. Its well-publicised problems date back to its participation in the ill-advised £49 billion (1) ….. of the Dutch bank ABN Amro in 2007, the largest deal in banking history. However, the bank entered the record books once again in 2008 when it declared losses of over £24 billion, the biggest ever seen in UK corporate history.

The conduct of RBS prior to this catastrophe was in keeping with the culture of excessive risk- taking by major financial institutions, such as investment bank Lehman Brothers, which (2) ….. on 15 September 2008. This began what has been described as a ‘financial earthquake’ the effects of which were felt around the world. In the UK, this manifested itself as a loss of public confidence in several high-street banks, resulting in RBS customers, among others, withdrawing huge amounts of cash in what is known as a ‘(3) …..’ on a bank. In the UK, the government responded with an ambitious rescue package, informally known as a‘(4) …..’ of the banks. This involved the investment of £500 billion of public funds in buying up shares in unstable British banks, £37 billion of which was invested in RBS, giving the government a 72% stake. At the time, RBS share prices had fallen on the London Stock Exchange by just over 50%, from 175p per share to around 85p.

A further nine years of losses followed, but in 2017 the bank declared a profit of £752 million following a £7 billion loss in 2016. However, the bank was still under investigation in the USA from the US Department of Justice (DoJ), concerning the sale of financial products linked to (5) ….. mortgages (‘mortgages’ referring to loans taken out to buy property or land) and this was regarded as likely to affect any future profits. So, despite moving into profit, the bank did not resume the payment of dividends to its shareholders and was expected to do so only once it had reached an out-of-court settlement with the DoJ in order to avoid expensive (6) …...

RBS also faced disciplinary action from the European Union at this time. The EU demanded the sale of 300 high-street (7) ….. of the bank in a bid to increase competition, a decision which ultimately left some rural British communities with only the option of online banking. As a result of this, the bank had to make nearly 800 employees (8) ….., which made it even more unpopular with the public as it became apparent that these workers were unlikely to find work elsewhere. The bank had a public image of supporting the so-called ‘fat cats’ of banking, meaning those bankers who continued to take huge annual (9) ….. while the public and the organisation’s lower- paid employees suffered the consequences.

In May 2018, the bank announced that it had negotiated a $4.9billion penalty with the DoJ, clearing the way for the UK government to sell its 72% stake in the bank. CEO Ross McEwan said “Our current shareholders will be very pleased this deal is done. It does help the government sell a cleaner bank.” RBS shares (10) ….. by 5.5% to 291.5p in response to this news.

Refer back to the page opposite on the topic of the effects of the global financial crisis and match the highlighted words with the definitions below.

1. not solid; not strong; could change without warning 2. ownership; financial involvement 3. in conformity with; displaying the same behaviour as 4. available to be shared among a group of people 5. attempt; try 6. extremely wealthy people with the power to increase their own pay 7. made itself obvious or visible through a particular action or occurrence 8. punishment for breaking the law

Read the following passage about the global financial crisis of 2008 and complete the information with a word from the box below.

(a) poor (c) assets (e) trespassing (g) abandoned (b) liquidity (d) evict (f) conventional (h) foreclosure The 2008 financial crisis was partly due to certain banks lending money to the ‘sub-prime’ mortgage market. The adjective ‘sub-prime’ refers to the credit rating of the borrower. These are borrowers who are not able to obtain a (1) ….. mortgage due to having a very (2) ….. credit rating, and in the period leading up to 2008 they were seen as a new and profitable market by certain banks. Lenders charged these borrowers a higher than usual rate of interest because there was a much greater than average risk of them defaulting on the loan. The high interest rate was seen as compensation for the increased risk. In fact, many borrowers were given what were referred to as NINJA loans – ‘no income, no job, no (3) ….. . These borrowers were often given the loan without the requirement of having to put down a deposit.

The town of Stockton in California, population 260,000, became known as the ‘ground zero’ of the 2008 financial crisis because it was the first community where the number of borrowers defaulting on these risky mortgages became apparent. It was for a time referred to as the (4) ….. capital of the USA, and in 2008, one in every twenty-five houses was the subject of legal action by a bank as people became unable to repay the agreed monthly amount. The crisis that first became apparent in Stockton spread across the USA and eventually across much of the developed world as people lost their homes or were trapped in negative equity. ‘Negative equity’ is the term used to describe a person’s financial situation when the current value of his or her home is less than the sum outstanding on his or her mortgage. The banks were left without (5) ….. as a result. The sub- prime story and the role that commercial banks played in it was later explained well in the 2015 movie ‘The Big Short’.

Many journalists visited Stockton in 2008 and published stories about (6) ….. properties and the number of Estate Agents’ boards advertising houses for sale. Many houses had notices in their windows stating “bank-owned - no (7) …..”. What they also reported on was the effect of this on tenants who were renting their properties from landlords who had taken out sub-prime mortgages. Many tenants were up-to-date with their rent but had not realised that their landlord had defaulted on the mortgage because they are not entitled to notice of foreclosure. Many only found out when someone knocked on the door to (8) ….. them from the house.

• DISCUSSION POINTS • It is often said that ‘when the USA sneezes, the world catches a cold.’ Did the 2008 crisis affect the availability of loans and mortgages in your country? • Would it be possible for someone with a ‘sub-prime’ credit rating to obtain a residential mortgage in your country?