Bank Of England Shipwrecked On Northern Rock
Keywords: Bank of England, Northern Rock, Subprime Mortgage
The handling of the liquidity crisis at Northern Rock by the UK authorities has become a major embarrassment for the government and Gordon Brown in particular. The new Prime Minister has always stressed his achievements as Chancellor of the Exchequer during the period 1997 to 2007, while he was waiting in the wings for Tony Blair to retire. Yet within several days, his reputation for prudent economic management has been undermined.
The problems at Northern Rock, and other financial institutions, did not appear overnight. The crisis in the USA subprime loans market was well documented, as was the fact that this dodgy debt had been repackaged and sold on to UK and EU banks. Major banks in Germany as well as Barclays Bank in the UK are rumoured to have significant exposure to these dubious assets.
Northern Rock is a proactive UK mortgage lender who attracts some 73% of its funds from the wholesale market, and only 27% from private depositors. The subprime banking crisis effectively dried up the source of these funds from other mainstream UK banks and financial institutions.
What differentiated the UK from the USA and the EU, was the response of the respective governments and central banks. The Federal Reserve and the EU central bank were significantly easing liquidity pressures in financial markets during the summer of 2007. The Bank of England adopted a laissez faire posture and made statements to the effect that financial institutions should not expect to be protected by the Bank of England if they make imprudent decisions.
When the Northern Rock crisis became public and the Bank of England announced support, its position was endorsed by the UK government and the Chancellor of the Exchequer, Alistair Darling. However, ordinary investors were not persuaded by the Chancellor’s bland assurance that Northern Rock was solvent, and there was a run on the bank.
The Financial Services Compensation Scheme means that savings up to GBP2,000 are protected in full, and the next GBP33,000 at 95%. Beyond GBP35,000, there is no protection. Savers who were in a line outside Northern Rock branches often had deposits in excess of GBP50,000 invested in the bank.
The media coverage of panicking depositors who took no notice of the assurances of the Chancellor of the Exchequer evidently riled Gordon Brown, the Prime Minister. On 17 September 2007, the government announced that all savings in Northern Rock would be protected. This had the desired effect, and the run on the bank was contained.
On 19 September, the Governor of the Bank of England made a major U-turn. Only the week before, he was stating that central banks should only intervene when there are ‘economic costs on a scale sufficient to ignore the moral hazard of the future’.
In plain language, what this means is that intervention by the Bank of England is a last resort. It should only take place in dire circumstances. If the Bank bales out any financial institution which experiences problems, due to its own stupidity or imprudent policies, the Bank’s support could be construed as endorsing or even rewarding bad practice and could encourage other institutions to take excessive risks in the pursuit of profits.
The Bank of England has now announced a package of measures which will effectively enable all UK banks to weather the current crisis, regardless of whether they have operated imprudently or not.
This has now moved the focus of attention away from the troubles of Northern Rock and has led to questions concerning the Bank of England’s handling of the crisis.
This U-turn raises a series of intriguing questions. Firstly, if these measures had been put in place two weeks ago, would the crisis at Northern Rock have been averted?
Although this is a hypothetical question, the answer is probably in the affirmative. Whether such a move would be good for the UK economy is probably to be answered in the negative.
Secondly, could the problems at Northern Rock have been handled better? The answer is undoubtedly yes. Northern Rock would have been an attractive target for takeover activity. However, the damage to the brand name is now irredeemable and there is little likelihood of a takeover at an early date. In any event, the brand name is likely to be a liability rather than an asset.
Thirdly, is the Bank of England to blame? While the Governor of the Bank was forced to make an embarrassing U-turn, the hidden hand of the government is easy to detect. There are few precedents for UK banks going bankrupt in recent history. While London and County Securities and other secondary banks went bankrupt in 1973, none of these companies was a major player on the scale of Northern Rock. However, in 1973, the Bank of England did launch a lifeboat scheme in order to avert a domino effect. It was rumoured at the time that Nat West Plc was at risk.
The 1973 lifeboat scheme is obviously well known to current Bank of England staff. One can infer that the Governor and his colleagues were initially prepared to let Northern Rock go into receivership and for its mortgage loans to be taken over by a stronger organisation. The depositors’ funds would be safeguarded, but there would have been many sleepless nights.
It would seem that the Bank of England is independent of the UK government when it is pursuing government policy. However, if it pursues policies which it deems in the interests of the UK economy, yet are contrary to short term political expediency, then this independence is an illusion.
By sending out a lifeboat, the Bank of England has become shipwrecked on Northern Rock.
Leslie Hardy is the UK Chairman of Wellington Estates Ltd, a North Cyprus property development company. Read more on this topic at www.wellestates.com
Previous Articles Highlighter:
Equipment Leasing Gives Your Business The Competitive Edge (1)
During this time, the equipment loses value faster than balance of the loan decreases, leaving the business in a negative asset situation. If the equipment needs to be replaced before the loan is paid off, it must be sold at a loss and another loan secured to purchase new equipment.
Education For Online Trading (2)
You can pump yourself up by thinking of all the money you save when you don't have to pay someone a commission for decisions you have made yourself. You can find the same information that brokers use to make their online and in house trading decisions, without leaving your home.
Coins To Own Now For The Regular Coin Collector Part I (3)
I will emphasize RED coins here as red/brown or just brown BU coins will likely not be as highly desired. The reason I think the RED ones will be hard to come by and increase in value is the same as stated before.
How To Lower Your Credit Card Interest Rates (4)
If you have the means to pay a little extra on your credit card bills, do it. This will show that you are eager to pay off your debt, so you are less likely to go bankrupt, and more likely to make your payments on time.
Is Buying A Car With A Credit Card Possible? (5)
But is it really saving you money, or are you paying more? Credit Limits Buying a car with a credit card requires a much higher credit limit than it would if you were just using the card to make random purchases at a clothing or grocery store, depending on the price of the car.
When Is Your Credit Card Interest A Tax Deduction? (6)
The whole question is, "Is a tax deduction worth that kind of risk?" Court helps people to learn about how to apply for business credit cards. You can read more of his work by visiting: applyforcreditcards.name.
Get Rid Of Your Bank And Still Get Out Of Debt (7)
A disadvantage is prosper.com can only lend up to us $ 25,000 only and lenders may not ask for collateral in order to lower rates. James Brown writes about www.simplybestcoupons.com
Portugal - An Investors Home Away From Home (8)
Since that year, construction of new building has been minimized. This has led to an increase the price of the properties by as much as around 15 to 20 percent per year.
How To Buy A Home After Foreclosure (9)
The first step in looking to buy a home after foreclosure is rebuilding credit. This takes time and a lot of patience, but lenders are more likely to consider an applicant who has worked to rebuild credit and can prove that he/she can make payments regularly and on time.
Can Consumer Credit Counseling Help Avoid Foreclosure? (10)
Consider these agencies first above others and ask questions about what to expect. Doing the research can keep you out of trouble. Many counseling agencies work by asking that you make a monthly payment to them.
Cheapest Car Insurance -Tips To Help You Find The Cheapest Car Insurance Quotes (11)
Auto or car insurance rates and quotes can be quite different for each company because there can be many variables in the plans. Find out if you can make your auto insurance payments online.
Consumers Should Keep 'Close Eye' On Credit File (12)
He said: "As the US credit crunch spills over into the British economy, we all need to keep an eye on our credit commitments and keep checking our credit report.
Financial Aid: Beware Of Scholarship Scams (13)
But promises weren't kept, and students who tried to obtain refunds were often met with resistance and even harassment. College Money Matters is just one example of scholarship-service scams out there.
New Financial Advisory Service Launched In North Of England (14)
Writing in the Guardian earlier this year, former home secretary David Blunkett and Kate Green, chief executive for the Child Poverty Action Group, claimed that the government and financial service providers need to do more to help the three million adults unable to access mainstream forms of credit.
Car Buyers 'Should Take Time' When Purchasing (15)
He claimed that by opting for forecourt finance deals ahead of a low-rate loan, due to sheer convenience, Britons could be losing out on millions of pounds every year. Research from the financial services firm also showed a rise in the number of Britons looking for a motor vehicle which is "cheap to run, insure and maintain", with a competitively-priced loan a possible option for those looking to keep the costs of having a car down.
Mortgage Marketing Techniques - Generating Mortage Leads (16)
The resulting lead you get will have a good chance of being closed. You will, of course, be paying a fee or a percentage to the lead generating company.
Brits Need 'Control Of Financial Affairs' (17)
For those worried they are not in a position to put a sufficient amount of money away for retirement, a debt consolidation loan could well be an advisable option as a means of getting on their financial feet.
People Need To Be 'Tax Savvy' With Their Finances (18)
Abbi Rouse writes for All About Loans where visitors can apply for self employed loans and also focuses on bad credit loans , and debt consolidation loans for UK Homeowners.
Mobile Bills Could Cause 'Unpleasant Shock' For Tourists (19)
However, with just over a quarter of respondents (29 per cent) stating that it will take them up to three years to complete making repayments, external affairs director Neil Munroe reported that by constantly having "a high level of credit outstanding", consumers could end up damaging their financial histories which in turn could impinge on their access to competitively-priced loans in the future.
AI: Alpha And Index Funds (20)
The return which is correlated to the market is beta. An index fund should have the same return (positive or negative) as the index it mimics. (One of the controversies surrounding some ETFs is their performance has not tracked their underlying index.) The theory behind Alpha and Index Funds is multi fold: 1.
Newer Articles Highlighter:
Seychelles CSLs - The Investment Solution (1)
Seychelles CSL The CSL (Company Special Licence) is a Seychelles domestic company (incorporated under the Companies Act 1972), which is granted a special licence under the Companies (Special Licence) Act 2003.
Could You Pass A Retirement Exam? (2)
The other piece of this is that you must save at the same time if you plan on living comfortably when you are no longer working and earnings a pay check.
The Pre-Retirement Stage (3)
2. You have left your job and are just thrilled about being home more and spending time with your spouse. They, on the other hand, have their own life and they really don't want to rearrange their life to accommodate you.
Loans Can Be 'A Force For Good' (4)
Also appearing at the meeting, Teresa Perchard, director of public policy for Citizens Advice, cited the need for more financial education to help Britons adopt a more responsible attitude to loans and other areas of their money management.
Young People Witness Rise In Inflation (5)
The news comes despite the research institution revealing that the official headline rate of inflation fell by 0.1 percentage points over the course of August to 1.9 per cent. Commenting on the figures, Shona Dobbie, head of the Alliance Trust Research Centre, said: "Even though monthly inflation has fallen, our four-year study continues to highlight the extent to which the UK's elderly are one of the groups hit hardest by current high levels of inflation.
Parents 'Helping Grown Up Children Pay Off Loans' (6)
Keywords: loand, debts, debt, consolidation, personal, secured, finance, credit, cards Millions of parents are helping their grown-up children pay off their debts, new figures reveal. In statistics released by MoneyExpert, some 40 per cent (7.5 million) of adults with grown-up children have given their offspring aid to either pay off completely, or to contribute a payment towards, money owed on utility bills, loans and other areas of financial demand.
'Concerning' Number Of Parents Sacrificing Financial Future (7)
Those concerned they will be unable to manage the costs of sending their child to private school may wish to take out a debt consolidation loan. By merging previous debts accrued from various loans, credit cards and other forms of borrowing, consumers may be able to free up more money each month which in turn could be put toward tuition fees or saving into a pension scheme.
Benefits Of Staying In A Holiday Rental Home (8)
The only thing that can sometimes put a downer on an otherwise excellent holiday is a bad hotel. Whether the basic standards are bad, the service is terrible or the holiday brochure forgot to mention that it's actually on a building site, these things can affect your holiday in a major way.
Brits 'Set For Financial Difficulties In Later Life' (9)
Earlier this year, Helen Saxon, spokesperson for the Finance and Leasing Association, claimed that opting for a debt consolidation loan ahead of credit cards will see consumers liable to pay lower rates of interest on their borrowing.
Dealing With Bad Credit Melodrama (10)
However, they are a step towards rebuilding one's credit. Of course, one also has the option of living a completely credit-free life. However, this might not be helpful in rebuilding one's credit history.
The Advantages And Disadvantages Of Using Department Store Credit Cards (11)
Sometimes even the rewards do not make up for the money you spend on interest just to get these cards. Making late payments on these will also allow department stores to shoot your rates sky high, so you have to pay on time, or the card will be more of a burden than an advantage.
All About Thrift Savings Accounts Part Two (12)
These types of funds are expected to be restructured in 2010, when the then L2010 fund will become similar to the current L Income fund, and a more aggressive L2050 is expected to be established.
Retirement Options 457 Plans (13)
The maximum amount allowed is 100 percent of total unused deferrals or $15,000.00, whichever amount is greater. Retirement planning is an important step in ensuring financial stability for both yourself and future generations, and it is essential that you speak with your financial advisor before deciding to join this, or any other type of retirement plan.
What Makes A Great Credit Card Offer? (14)
You need to be able to talk to someone who is willing to listen if you feel that there has been a mistake made by that company. Court helps people to learn about how to find credit card applications.
The Most Important Tips You Can Teach Your High School Child About Credit Cards (15)
Surprisingly enough, however, raising the limits of your credit cards can be done by anyone, no matter what type of income you have. This simple technique will help you earn skymiles that would otherwise not be gained, obviously, with cash or debit cards.
Dealing With Home Improvement Questions (16)
That way, you shall be better placed to explain how exactly you would like the improvements to be carried out. Also, see to it that you do not choose the first contractor that you come across.
Increasing Our Credit Card Points (17)
More importantly, it could land you with little value for your money. It is always a good idea to read the fine print prior to signing any credit card deal.
Retirement Investment In Portugal - Our Story (18)
Alentejo Home Real Estate is an Authority on the legalalities surrounding property sales in Portugal, with 9 years experience and hundreds of satisfied clients they are the number one realtor in the Alentejo Region of Portugal.
Alentejo Region In Portugal Is Called The New Tuscany (19)
Mortgage debts or tax debts on a house can be another problem. Projects (in case of building or rebuilding) should be signed by a Portuguese or in Portugal registered architect.
16 Simple, Everyday Ways To Save Money (20)
Write on the back sides of paper. Use reusable containers in your lunches. All these little things really do add up, and it is important to show our children how we can all be part of the solution.