This trend of borrowing also impacted UK banks and financial institutions as well, but the extent was less of course.
Once the banks find the lending much lucrative with attractive returns and talks of all round developments, banks start lending to the maximum extent possible, with the notion that 'high risk implies higher returns'. In some case the banks also start lending money to high risk customers as well, in the belief that they'd be able to extract the money in any form from the borrower. This trend gradually spread to sub-prime lending practices. This type of lending is not very common around the world, but in US and UK such lending is preferred by specific categories of population, who are categorised as high credit risk population. But in recent past when sub-prime borrowers started preferring to desert their houses instead of paying back the loans, the banks found themselves under huge debt. This set in motion a chain reaction, resulting in adverse impacts on the stock market, which in turn impacted the confidence of an average investor. The ups and down in equity markets is not a new phenomenon, but the UK equity markets have not recovered from the shake ups. With threats of failure of many reputed banks, the stock market appeared to be the only option where the investor can look for liquid cash. This started a continuous downtrend in stock markets in US and UK. Having stakes in international markets the Foreign Institutional Investors (FIIs) in turn started selling their stakes in other markets as well. The trend has been continuing. The net result inter-banking borrowing rates were hiked by banks in order to preserve maximum liquid assets for instilling confidence amongst their customers. Once the bank to bank rates were on the rise, developmental projects started taking a hit, which in turn had an impact on the marketing potential of a whole range of materials including building materials, consumer goods and services etc.
With rumours of failing banks, people started taking out their deposits from banks and instead started keeping the money within their custody. This resulted in difficult situation for banks and many banks were on the verge of going bust in UK. Owing to such circumstances, government of Iceland was also forced to intervene. Glitnir bank became the first bank to be nationalised by the Iceland government (Wardell and Satter, 2008). This trend is also quite apparent the world over in many countries including US, Saudi Arabia, China, Japan etc. in order to avoid major breakdowns in the respective economies.
Now people are left with less disposable incomes, as some of the investments are stuck up in stock market, some others are gone bust with drowning banks and financial institutions. With companies also resorting to job-cuts, the disposable income levels are further going down with each passing day. People having taken loans from banks and other financial institutions started finding themselves in difficult position to payback those loans. This had a cascading effect on those banks which had earlier resorted to sub-prime lending and unreasonable lending. And banks started feeling the pressure. Northern Rock started sending out SOS signals to the government of UK. Subsequently the government started measures to nationalise the Northern Rock and pump in money