Page last updated at 10:31 GMT, Friday, 26 September 2008 11:31 UK

Q&A: Financial crisis and you

HBOS sign
The fear was that HBOS might face a run on its deposits like Northern Rock

The past month has been one of unprecedented turmoil in the financial markets.

Each day has brought an extraordinary development that would have seemed astonishing just the day before.

In the largest bank failure yet in the United States, Washington Mutual, the giant mortgage lender which had assets valued at $307bn (167bn), was closed down by regulators. It was then sold to rival JP Morgan Chase for $1.9bn.

The US investment bank Lehman Brothers was allowed to go bust while one of the world's largest insurers AIG was bailed out.

In the UK, a takeover of the biggest mortgage lender HBOS was approved by the government to forestall a run on it by customers.

To try and put an end to the turmoil, the US authorities have been seeking approval from Congress for a $700bn bail-out plan to relieve the US banking system of its mortgage debts and limits were put on so-called "short-selling" of shares, both in the UK and the USA.

BBC News looks at whether the average person is really in a different position from just a couple of weeks ago.

Is my bank safe?

This is what the UK (and US) government and financial authorities have been worried about - that banks exposed to too many defaulting mortgages might collapse.

With the very fear of this causing the financial system to seize up again, the worry was that this prospect might become a self-fulfilling prophecy, with a domino effect undermining the banking system here and abroad.

Hence the rush to ensure that HBOS was taken over, despite the bank and the authorities saying until they were blue in the face that it had lots of money.

What about my savings?

As long as you have no more than 50,000 saved with any one UK financial institution, you will not lose if the worst happens and your bank goes under.

That is because of the protection offered by the Financial Services Compensation Scheme.

However, you might have to wait a while to get your money back.

Unlike in the US, where small banks frequently go bust, there is no mechanism in place yet to effect a swift rescue of a UK bank.

If you have more than 50,000 in any one institution you might consider moving some of it to another one.

Will my mortgage become more expensive?

Most likely yes, if you are looking for a new deal.

The cost to banks of borrowing and lending money between themselves has risen again, driving up the cost to banks of funding and offering new fixed-rate and other mortgage deals.

Libor, or the London Interbank Offered Rate, is the rate at which banks lend money to each other, and the three-month rate has reached its highest level since December, rising well above 6%.

Three major lenders have raised some of their mortgage rates - HSBC, Woolwich and First Direct - and other lenders are reviewing their deals.

The takeover by Lloyds TSB of HBOS will also reduce competition among mortgage lenders, tending to make it easier for the remaining lenders to charge that bit more for their loans - or offer less interest on bank accounts.

So mortgages are likely to be set higher above the Bank of England's base rate than was the case before.

The Bank of England has said the rate of inflation would soon hit 5%, before falling back. Once it is convinced this is about to happen it may well cut rates to help stimulate the economy and overcome the impending economic recession.

So in due course mortgages should become cheaper; but not just yet.

Will this financial crisis make the economy worse?

Let us assume that no more banks get into trouble and that things stabilise.

Even then, the downturn is likely to be worse than would have been the case just a few weeks ago.

Banks and the money they lend are essential to the normal functioning of the economy.

If they have less money to lend, or do so on much more expensive terms, this will inevitably restrain economic activity, just as if the Bank of England had jacked up its bank rate.

Is my job more precarious than before?

Potentially - and not just for bank employees and others in the financial sector.

In more normal times, the big economic news this month would probably have been the further rise in unemployment.

Let us remember what that story is. Unemployment is now at its highest level for nine years at a rate of 5.5%.

Redundancies have been accelerating and the number of vacancies, and those actually in work, is dropping.

Sadly the trend in unemployment is firmly upwards and will probably continue until the economy starts to pick up again.



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