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Royal Bank of Scotland (RBS) has announced the largest annual loss in UK corporate history. Do you have a question about this or any other aspect of the current financial crisis? The BBC's Business and Economics team would like your questions.
Here the BBC's economics editor Hugh Pym, personal finance correspondent Richard Scott, and business reporter Anthony Reuben tackle a selection of your questions about fractional banking, business profits and the end of the recession.
YOUR QUESTIONS
ANSWERS
Can you explain where all the money has actually gone? By money I mean both that in the assets (toxic and other) and that lent or invested by the governments of the world in the banks etc. I ask because I cannot get my head round it!Charles Heap, Guime, Lanzarote
Hugh Pym: The credit boom saw asset prices, particularly houses, pushed up to unsustainable levels. Banks provided increasing amounts of mortgages to fund property purchases. When the correction came in the US, prices fell and homeowners began to default on their loans. Banks discovered they would not be repaid a sizable proportion of what they lent out. So these loans (bank assets) have had to be re-valued downwards or written off. So the money in question is lost forever. That being said, banks may in time recover more than they expect on some of their repossessed properties.
Government money which was used to buy bank shares may well be recovered. At some future date, when the markets have picked up, governments might be able to sell off their shares at a profit. Then again they may never get back all they invested so that money would be lost.
Taxpayers money has also been put at risk by guaranteeing some bank loans. If some of those loans go sour, the taxpayer would have to stump up. But again, it's possible that the loan values don't plunge any further and public money isn't called on.
My question is simple. When will this end?Matthew Hughes, Widnes, Cheshire
Hugh Pym: There is a view that the financial system won't stabilise until American house prices have stopped falling, and show signs of recovery. Many of the current problems stem from the US 'sub-prime' housing market crisis. When that crisis ends, the beginning of the end of the credit crunch may be in sight.
A number of you have been asking questions about fractional banking: What role has our banks' Fractional Reserve system had in creating our current crisis?Huss Woo, Walton on Thames.
Rev Peter Brown from Northampton and Andrew Parford from Uxbridge asked similar questions.
Richard Scott: Fractional Reserve Banking is the system that allows banks to lend money in our savings and current accounts to borrowers. Banks have to keep a proportion (fraction) in reserve, the rest can be lent. To illustrate, imagine you've just deposited £100 and the bank has to keep 10% in reserve.
It could then lend £90 and keep £10 of your original deposit. Of course your savings account still shows a balance of £100 so essentially the bank has 'created' £90. Critics argue this is bordering on fraud, since the extra £90 doesn't really exist - and if savers lose confidence in their bank and demand their money back all at the same time (a bank run) the bank will be in severe danger of collapse since it doesn't actually have that money available.
On the other hand, the system makes it easier for banks to lend to people who need loans - for businesses, for mortgages, whatever. If banks had to keep 100% of deposits, loans would dry up (even more so than they have!), with severe economic effects. Lending the money also allows the bank to charge interest which it then pays a proportion to savers as interest on their deposits. If the bank was not allowed to lend the money, far from being paid interest, savers might actually have to pay the bank for looking after their money!
What businesses are profiting from the recession, and why?Kevin Morrison, St Helens, UK
Anthony Reuben: There are several businesses you would expect to do well in a recession.
Some products, such as standard white-sliced bread and baked beans are known by economists as inferior goods, because people buy more of them when their incomes fall. We have also seen unexpected growth in sales of some grocery items such as olive oil, which is explained by some as a sign of the "stay-at-home economy". People are eating out less and cooking at home more, but they are prepared to pay a little bit extra for their ingredients. As part of the same effect, take-away food such as pizza delivery services have been doing well.
There were signs early in the downturn that value retailers such as Lidl and Aldi had been doing well, as had shops such as Poundland.
But beware of simple sales figures! While some retailers have been reporting rising sales, that does not mean they are making any money. There has been hefty discounting as shops desperately try to get customers through the door. A good example of this is flat-screen televisions. Sales of them have risen sharply, but prices have fallen dramatically, and at least one manufacturer (Pioneer) has pulled out of the market because it could not make a profit.
If the Government want to stimulate spending, why are they supporting the reduction of interest rates when there are clearly more savers than borrowers? Surely if savers are in the majority the interest paid on their accounts would be more likely to be put back into the economy.John Langham, Edinburgh
Richard Scott: There are more savers than borrowers, but the total debt of borrowers is much greater than the total deposits of savers. So cutting interest rates saves borrowers more money than it costs savers - and this is just for individuals, excluding businesses and their loans. The hope then is that borrowers will take the extra money they have left after making their debt repayments and spend it. Of course, many will decide to keep their repayments the same, and pay back their debt faster instead.
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