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Interest rates have been cut by 0.5%. Six central banks, including the Bank of England, have made the move in an effort to steady the tottering global economy.

The Bank of England’s action drops the base interest rate from 5% to 4.5%. The European Central Bank cut its rate from 4.25% to 3.75%, and the central banks of Canada, Sweden and Switzerland all took similar action. The US Federal Reserve has trimmed rates from 2% to 1.5%. China also cut its rate, but only by 0.27%.

This unprecedented coordinated global action comes amid tumbling world stock markets. European financial markets reacted favourably to the news, pulling back some of the losses.

In another major development, the UK government unveiled a package of measures aimed at rescuing the banking system. The total cost could add up to a whopping £500 billion.

Banking shares have plunged after news that major UK banks had met with Chancellor Alistair Darling to discuss Government fundraising.

Royal Bank of Scotland (RBS) shares dropped 17%, HBOS tumbled 14%, Lloyds TSB fell 11% and Barclays were down 5%. Barclays has strongly denied that it has requested financial help from the Government. RBS and Lloyds TSB have both declined to comment.

Treasury rescue plan

The Treasury is understood to be putting together a plan that would involve the Government providing extra cash to the banks in exchange for stakes in them.

Lending problems

Also depressing shares in RBS, which owns NatWest bank, has been the recent news that the ratings agency S&P has downgraded it. This effectively means that S&P think it is a less safe institution to lend money to. This will only make things worse for RBS. It is the difficulty banks are having in borrowing money from each other that is at the root of the credit crunch.

As banks find it increasingly difficult to borrow from each other, they have been forced to borrow from the Government instead, to the sum of £200 billion over the past year.

Global banking gloom

Things are getting tougher for foreign banks also. The Government of Iceland has had to take control of the country’s second biggest bank Landsbanki. Landsbanki owns the internet bank Icesave, which is now preventing customers from withdrawing money.

If Landsbanki were to fail, savers would be refunded their first £16,000 from the Icelandic Government and then up to £34,000 from the UK Financial Services Compensation Scheme. But claims from the UK would all be handled by the UK authorities.

The Financial Services Authority (FSA) has raised the compensation limit for savings from £35,000 to £50,000 pounds per customer claim. This comes after signs of savers withdrawing cash to put into “safer” havens. This sum could be further increased as the British Government battles to restore confidence in the banking sector.

Britain’s move fell well short of Ireland’s no limits guarantee for all savers. There are now worries of significant cash outflows from British to Irish banks, due to savers worries about the security of their deposits. Nerves are still unsettled after the rescue of Northern Rock and Bradford & Bingley and the takeover of HBOS.

The FSA indicated that the raised compensation ceiling would take effect from October 7, and that savers with joint accounts would be eligible to claim up to £100,000 should their bank collapse.

With around 40% of UK savings accounts exceeding £50,000, a further increase in the compensation cap will be needed to sufficiently bolster saver confidence. The FSA stated that it will consult on further reforms, including considering whether the compensation limit should be increased above £50,000.

Global shares have risen overall due to increasing optimism that a revised version of the $700bn US banking rescue plan will be approved by US lawmakers.

With the US Senate set to vote on the amended plan, hopes are growing that sufficient changes have been made to get the bill through.

The UK’s FTSE 100 share index was up 0.9% at 4,950 in morning trading. UK stock prices were boosted by news that the Bank of England is to inject a further £17bn into the money markets.

Mortgage lending crashed in August, with advances falling to just 5% of the previous month’s total. Net lending in the month amounted to only £143 million, the lowest figure ever recorded by the Bank of England’s statistics series which began in 1993. July’s sum was close to £3 billion.

The slide was almost certainly caused by the combination of falling house prices and the credit crunch. Speculation over the Government’s recent stamp duty announcement is also believed to have caused house buyers to delay borrowing during August.

Total mortgage advances totaled £19.19 billion during August, the lowest figure for 6 years. But it was net lending, which strips out repayments and borrowers remortgaging elsewhere, that took a hammering.

The situation looks set to worsen, with the number of mortgages approved for house purchase declining to a new record low of 32,000 during the month.

Mortgage lender Bradford & Bingley (B& B) has been nationalised in the latest setback for the British banking sector.

The Treasury has added B&B’s £41 billion loan book to the public balance sheet and guaranteed around £9 billion in other commitments. The move comes after Northern Rock’s nationalisation in February, which added £87 billion to the national debt.

B&B has 3,000 staff and 197 branches. Its branches and its savings business have been sold for £612 million to Spanish bank Santander. B&B has 2.7 million savings customers and £20 billion in deposits. Santander owns Abbey and recently agreed to buy Alliance & Leicester, so the deal will boost its position in the UK with 1,286 branches and a 10% share of the retail savings market.

The deal comes only 2 weeks after a £12.2 billion rescue of Halifax Bank of Scotland by Lloyds TSB was announced.

The Financial Services Authority (FSA) decided that B&B was not strong enough to continue as a deposit-taking bank due to a loss of confidence in the firm.

The Bank of England is to launch another intervention into the faltering financial markets with an offer of at least £40 billion to cash-starved banks. The Bank usually offers loans on a monthly basis, but will hold auctions every week from Monday while the problems in wholesale credit markets remain.

The Bank of England has not revealed the amounts involved in future auctions, but they will probably be of a similar size to Monday’s if lenders snap up the funds.

Mortgage Lenders are raising loan costs because of a sudden escalation in the rate at which banks lend money to each other – as many hoard funds. Interbank three-month lending rates jumped to 6.28% on Thursday, well above the Bank of England’s 5% base rate.

Despite the Bank of England’s move, the 700 billion US dollar bail-out of the US banking system is likely to have a bigger effect in easing liquidity problems in the UK financial markets.

HSBC has just announced that it is to axe 1,100 jobs worldwide, blaming the credit crunch for the decision. HSBC employs about 335,000 people globally.

Unfortunately, about half of the cuts will take place at its global banking and markets operation in London at Canary Wharf.

Last month HSBC’s half year profits dropped by 28% to $10.2bn, due to a $14bn to write-off of bad debts in the US, and asset write-downs.

Financial institutions around the world have been coming under increased pressure from the current turmoil on the markets.

The problems have forced governments to intervene and shore up money markets. Earlier this year, the UK government was forced to purchase Northern Rock, while in the US lenders Fannie Mae and Freddie Mac had to be rescued from collapse.

Mortgage provider Bradford & Bingley (B&B) has just announced that it is cutting 370 jobs in an attempt to rein in costs. The move comes after B&B posted losses of £26.7 million in the first half of the year.

Three hundred of the job losses will come with the closure of its mortgage processing centre in Borehamwood, Hertfordshire. The company will transfer Borehamwood’s mortgage processing work to its larger operations centre at Bingley, West Yorkshire.

The buy-to-let specialist has been hit hard by the credit crunch and rising mortgage payment arrears. B&B hopes to save £15 million a year through the move.

The company warned that further cuts were to come following a review of its head office in Bradford. B&B employs around 3,000 staff and has 300 branches. The company’s shares fell 10% today, and have slumped more than 90% during the past year.

Mortgage lending in August slumped to less than half of July’s figure of £4.8 billion, reaching its lowest level since February 2001.

The British Bankers’ Association (BAA) put the sharp decline down to a combination of falling property prices, the present economic problems and financial providers’ tighter lending criteria as a result of the credit crunch.

Speculation that the Government was going to suspend stamp duty also curbed demand during August, as many delayed buying a house in the hope of not having to pay the tax.

The number of mortgage approvals for property purchase continued its downward spiral during August, falling to a new record low of 21,000, 5% less than in July, and 64% less than in the same month of 2007, the BBA stated.

Widespread belief that house prices will continue to fall for some time to come also appears to be stifling housing market activity. Increasing concerns about the economy and job prospects are also contributing to the problem.