Here in the UK, we pride ourselves by the strength of our financial systems. After all, until the run on Northen Rock, there has not been a similar, systematic, run on a bank for a long, long time.
I believe the run on Northern Rock has highlighted some deep seated weaknesses in our systems caused by the huge levels of personal debt and our reliance on maintaining public confidence in our systems.
Sure, Northern Rock’s business model is different to many of the other banks: they are more reliant than others on borrowing money from the markets and they do an awful lot of lending, at low margins, to the sub-prime or near sub-prime market. But they have been around for a long time and in the eyes of Joe and Joanne Public have a reasonable reputation. Yet over the course of just a few days, despite repeated assurances from NR management, the Bank of England and the government, investors queued up to take out an estimated £2 billion of savings, in what was near hysteria.
This highlighted to me just how reliant the UK’s banking system is on the confidence of the public, how easily that confidence can be dented, and that despite assurances from our lords and masters, once confidence has started to deteriorate, just how quickly that can accelerate across a wide front. Surely all the banks must be worried that there for the grace of God go they and will be holding talks with the Bank of England over how such a situation can be avoided n the future.
It was only a few months ago that the Bank of England produced a lengthy paper assessing the risks faced by the UK banking industry. Then the Bank of England concluded that while personal debt, now £1.4 trillion and growing at three times the rate of inflation, was an issue, on balance they did not foresee any major issues which would cause difficulties or a near collapse of the UK banking sector. Yet they failed to pick up on the exposure that became so evident here in the Northern Rock run. And if they can fail to pick up on this, what else have they missed, and just how robust are the conclusions they have drawn in that report? After all, in that report they concluded that the level of personal debt could bring about huge losses to the banking sector, on a worst case basis ten times the sum the Bank of England appears to have plugged into NR.
It makes you wonder, doesn’t it, whether the experts truly understand the full extent of the risks the UK financial institutions are facing as a result of both their UK or global dealings.
Filed under: General insolvency topics and news
“I believe the run on Northern Rock has highlighted some deep seated weaknesses ”
No the system is fine, the Directors have failed to declare themselves insolvent when it is evident they were. If the Share price had been suspended on 7th September and Administrators called in, they would be safely tucked up with someone today, whilst taking a bath the shareholders would have got maybe £3 a share and no panic, run on the branches.
It is evident that the more potential (and highly respectable) bidders look at the corpse the less they like what they see.
No bank can sustain a run of the level NR suffered withouit financial support from the maket or a lender of last resort such as the B of E, because there is a mismatch between the speed at which investors should be paid their cash back when they ask and the ability of borrowers to repay in full all such borrowings as speedily, especially when a chunk of those debts are long term mortgages.
To argue that NR were insolvent is to argue that banks must maintain a cash balance, ready to be called on at any moment in time of at least the level of investor debts.
This is not practical for any bank. Indeed it would be no better than punters keeping the cash under the mattress, doing nothing.
Whether anyone will buy NR has nothing to do with the value of the business and any skeletons they may find. Sure there are things in there that purchasers will not like, but it is far more to do with prospective purchasers’ ability to fund the purchase without putting themselves at risk should there be more chaos in the banking markets. After all, didn’t Barclays also unexpectedly go cap in hand to other banks for cash a few weeks ago? If it can happen to Barclays, it can happen to any bank, and that is what concerns potential buyers.
So I do not share your optimism that the system is fine: it cannot be when the unexpected happens. Nor do I share your views on NR being a complete basket case. Sure, there is a lot wrong within, but it is far from dead.