Economic history · The 2008 Financial Crisis
Seven steps, about ten minutes, and a question at each. You need no economics and no preparation, only a willingness to guess before you are told.
Britain came out of the recession having lost more of its output than America and fewer of its jobs, and what paid for that was a pay rise that never arrived.
Seventeen years after the state bought into two British banks, the last of the shares was sold. One bank returned what went into it and one did not.
Seven steps on what came back, on why the Office for Budget Responsibility has published the cost as a gain and as a loss, and on the three things that were changed afterwards.
What this module covers
Written for every level. Tap any underlined word for what it means, and open the boxes below for the economics behind each decision. If you already know the theory, skip both and the history reads straight through.
Step 1 of 7
On 21 April 2017 the Treasury announced that all the money put into Lloyds Banking Group had come back.
The money went in as a : the state owned a piece of the bank rather than lending to it. A bank that makes a profit pays part of it out to whoever owns it. So money came back two ways.
The Chancellor put the amount injected into Lloyds during the financial crisis at £20.3 billion, and the amount received since selling began in 2013 at £20.4 billion.
Take a guess. You are not expected to know the answers, and being wrong is what makes a number stick.
The £20.4 billion that came back is more than the £20.3 billion that went in. What does the larger figure count?
The government provided about £45.5 billion to the Royal Bank of Scotland over the course of 2008 and 2009.
The state took shares for that money rather than a promise to pay it back. It gets it back only by selling those shares, and by taking whatever the bank pays out along the way.
The last of those shares was sold on 30 May 2025, in a bank by then called NatWest Group.
So the money went into the Royal Bank of Scotland over two years, and took seventeen to come back.
How much did the state get back in total from its shareholding in that bank?
For scale. Lloyds returned £20.4 billion against the £20.3 billion that went into it.
British households had billions of pounds in that bank's London branch when it failed, and the state paid every one of them out.
The estate of a failed bank is what it still owns: loans people are paying off, buildings, cash. It is sold over years, and the proceeds go to whoever the bank owed, which by then included the British government.
The British government was paid out of that estate in stages, the last of them £740 million in January 2016.
The state paid out £4.5 billion to those households. Was what it eventually got back from the failed bank higher or lower?
A tie counts as correct either way.
For scale. At that date the state still held shares in both of the British banks. It sold the last of them nine years later.
The government did not have the money it put into the banks. It borrowed it, and paid interest on that borrowing for as long as the borrowing lasted.
A government that has not got the money borrows it, and pays interest on the borrowing for as long as it lasts. Count only what went out and came back and the rescue looks close to free. Count the interest on the borrowing that paid for it and the answer changes sign. Neither count is a trick: they answer different questions, and the second is the one a household would ask about a loan.
Count the cash alone, meaning what went out to the banks and what came back from selling them, and you get one answer. Add the interest on the borrowing behind it, which is called debt interest, and you get another.
The Office for Budget Responsibility, the OBR, put the cash alone at £15 billion ahead. That counts every loan as paid back and every share as sold at what it was worth at the end of March 2015.
So the OBR's two counts have moved in opposite directions ever since 2010, and neither of them is the dishonest one.
How much extra debt interest had the government paid on the borrowing behind the rescue, by the end of March 2015?
For scale. The OBR, asked in November 2010, made it a benefit to the taxpayer of £2 billion. Asked in December 2012, it made it a direct loss of £16.5 billion.
Go back to 2010, when regulators from the major economies agreed on 12 September to raise the least a bank must hold of its own money against what it lends.
That slice is what absorbs the loss when the loans go bad, before anybody else takes one. The international minimum had been 2 per cent: two pounds of the bank's own money for every hundred out on loan.
Banks were given until 1 January 2019 to hold the whole of what the new rule asks for.
What is the least a bank must now hold of its own money, for every hundred pounds it has out on loan?
For scale. A buffer of a further 2.5 per cent sits above the minimum rather than inside it, and was phased in over three years to 2019.
Go back to February 2009. The Banking Act 2009 created what is called resolution: the power to take a failing bank apart in an order somebody has chosen.
The powers exist because a collapse comes apart in whatever order it finds. With them, a failing bank is taken apart in an order the authorities choose instead.
Parliament wrote down what the powers are for. The first objective in the Act is to ensure the continuity of banking services in the United Kingdom and of critical functions.
The Act lists several objectives. One of them names the public purse. What does it say?
The Bank invents a crisis that has not happened, and works out what would be left of each firm afterwards.
A stress test works from a scenario written in advance, and every firm is put through the same one.
The Bank covers banks and building societies, insurance companies, and the firms that stand between traders.
So what the Bank tests is not what a firm has already come through, but whether it is prepared for the worst.
What does a stress test on a bank actually test?
That was module 7 of 7, the last in The 2008 Financial Crisis
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Lloyds
£20.3 billion in, £20.4 billion back by April 2017, counting sales and dividendsNatWest, the bank that was RBS
about £45.5 billion in, £35 billion back by 30 May 2025The Icelandic money
£4.5 billion paid out, £4.6 billion recovered by January 2016The whole rescue, on the cash
£15 billion ahead at the end of March 2015The whole rescue, counting the borrowing
£22 billion of extra debt interest, an overall cost of £7 billionThe same question, asked earlier
a £2 billion benefit in November 2010, a £16.5 billion loss in December 2012A bank's own money, against what it lends
2 per cent before the crisis, 4.5 per cent now, 7 per cent with the bufferYou met two terms in this module
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The rescue made money on the cash and lost money on the borrowing. The cost depends on which of those two sums you do.
[1] What the state put into Lloyds and what came back: HM Treasury, Taxpayers get all their money back from Lloyds, 21 April 2017. Read twice, identical both times. The Chancellor, Philip Hammond: the "£20.3 billion they injected into Lloyds Banking Group during the financial crisis", and "£20.4 billion since it began selling its stake in Lloyds in 2013", which includes "both sales and dividends". THE COMPOSITION IS THE POINT: the larger figure is sales plus dividends, not share proceeds alone, and the module says so. The spine's £900 million gain and £3.2 billion loss are two other measures again and do not print; they are different questions, not a contradiction.
[2] What the state put into the other bank and what came back, seventeen years later: Hansard, House of Commons, 3 June 2025, NatWest Group: Government Shareholding. Read twice, identical both times. The Economic Secretary to the Treasury, Emma Reynolds: "Over the course of 2008 and 2009, the Government provided circa £45.5 billion to recapitalise RBS"; "the Government received a total of £35 billion in relation to their shareholding in NatWest"; "This is approximately £10.5 billion lower than the amount of capital originally provided to stabilise the bank." The minister rounds to £35 billion where the spine has £34.98 billion, and the module prints the minister.
[3] What came back from the Icelandic bank's estate: The Landsbanki recovery, as recorded in the series' signed spine at link 43. NOT RE-FETCHED IN THE BUILD SESSION, and that is why it has its own id. The £4.6 billion recovered from the Landsbanki estate by January 2016, including a final payment of £740 million, is the spine's figure from its signed source note. What IS verified twice, for module 5, is the other side of it: £4.5 billion of British retail deposits in the branch when it failed (Commons Treasury Committee, HC 402), read twice for module 5. A later session should confirm the recovery directly.
[4] What the whole rescue cost, on the count that takes in the most anybody publishes: Office for Budget Responsibility, Fiscal impact of the financial interventions, Economic and fiscal outlook, July 2015. Read twice, identical both times: "a cash surplus of £15 billion" if all loans were repaid in full and shares sold at end-March 2015 values; "additional debt interest costs would have amounted to £22 billion by end of March 2015"; and "an overall cost of £7 billion to the Government". THIS IS THE MOST RECENT ALL-IN FIGURE THE OBR PUBLISHES.
[5] The same question, answered three times, three different ways: Office for Budget Responsibility, Economic and fiscal outlook, November 2010 and December 2012. Read: November 2010 gives "an estimated eventual benefit to the taxpayer of £2 billion, including fees and other income" - A GAIN. December 2012 gives an "estimated direct loss to the taxpayer on the financial interventions of £16.5 billion", against £14.3 billion nine months earlier. F2 IS CLOSED BY THESE THREE READINGS TOGETHER: the spine's £23 billion is in none of them, the OBR has never published it, and the module does not print it. The three figures differ because they count different things at different share prices, which is the step's own point.
[6] How much of their own money banks have to hold now: Bank for International Settlements, press release: Group of Governors and Heads of Supervision announces higher global minimum capital standards, 12 September 2010. Read twice, identical both times: "The Committee's package of reforms will increase the minimum common equity requirement from 2% to 4.5%"; banks "will be required to hold a capital conservation buffer of 2.5%", "bringing the total common equity requirements to 7%".
[7] The rule itself, and when it came fully into force: Basel Committee on Banking Supervision, Basel III: A global regulatory framework for more resilient banks and banking systems, December 2010 (revised June 2011). Read off the PDF, twice: "Common Equity Tier 1 must be at least 4.5% of risk-weighted assets at all times"; "A capital conservation buffer of 2.5%, comprised of Common Equity Tier 1, is established above the regulatory minimum capital requirement"; and Annex 4's phase-in row, "Minimum Common Equity Capital Ratio 3.5% 4.0% 4.5%", with the buffer reaching "its final level of 2.5% of RWAs on 1 January 2019". THE MODULE DOES NOT USE THE PHRASE "risk-weighted assets": the reader gets what it means to them, which is how much of their own money a bank holds against what it lends.
[8] What the law now says the point of shutting a bank is: Banking Act 2009, section 4: the special resolution objectives. Read twice on legislation.gov.uk, identical both times: "Objective 1 is to ensure the continuity of banking services in the United Kingdom and of critical functions", and "Objective 4 is to protect public funds, including by minimising reliance on extraordinary public financial support." THIS IS A BETTER SOURCE THAN THE TREATMENT EXPECTED. The Bank of England's approach-to-resolution document is disallowed by robots.txt and was not fetched by any route; its public page carries only "If a bank or building society fails, we make sure it happens in an orderly way", which does not support the beat. Parliament writing the objective into statute does.
[9] What a stress test is: Bank of England, Stress testing. Read: "Stress testing is used by the Bank to make sure the financial system, including banks and building societies, insurance companies and central counterparties, is strong enough to withstand severe scenarios such as a financial crisis", and the Bank sets stress tests "to find out if these sectors and individual firms are prepared for the worst". THE PAGE STATES NO FREQUENCY, so the spine's "annual" does not print and step 7 does not say how often.
Country data from the World Bank (CC BY 4.0) and the UNDP Human Development Report (CC BY 3.0 IGO)
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