You would be forgiven for thinking that in August 2007, most bankers gave up banking and took to reading Shakespeare. Because it was Shakespeare's Lord Polonius who said "neither a borrower nor a lender be." And so during August 2007, banks across the world decided to take this piece of advice literally, and stopped lending money to one another. This of course led to the now-infamous spectacle of the run on Northern Rock, as well as a host of other, very public, and phenomenally large problems across the whole Financial Services sector, with "contagion" spreading into other sectors as I write.

Throughout this blog I will attempt to explain, in layman's terms, exactly what happened, what the impact has been for businesses in general, and in particular, our customer base. More importantly we should ask what might happen in the months and years to come, and what our customers can do to either limit the impact, or to potentially profit from it.

So what happened?

There are a number of connected, yet very separate, causes, effects, events and impacts, which can explain what happened. These are, the "Credit Crunch", the "Subprime Mortgage Crisis," step changes in LIBOR rate spreads, the Mispricing of Risk, a run on Northern Rock in the UK, and the spectre of a housing market slowdown in the US and UK. I shall now attempt to explain what these are, and how they are connected.

The role of the Banks

To do this, I will firstly touch upon the role of the bank, and how it has changed over time. In the "good old days," a bank would take money from depositors and store it in a large vault to keep it safe (the RBS website has an interesting History of Banking in the UK). It would then lend some of that money to people, businesses and other banks. Everything was quite simple, because the bank was both the originator and holder of the loan (see figure 1) 

Figure 1 - Simple Lending in the Good Old Days