Northern Rock: Now the Government Panics
Posted on 17 September 2007 by
Northern Rock's Sales Director called me on Saturday afternoon with an update and confirmed:
- They will continue to seek mortgage applications but have priced their products to ensure a much lower level of applications than normal (This has actually been the case for a few weeks).
- All existing mortgage offers will definitely be honoured.
- All funds available under the terms of their flexible features continue to be available.
- All their Broker Development Managers will remain on the road but their targets have been reduced for the last quarter.
- They have no current plans to increase any of their mortgage interest rates but may tweak a few LTVs on together.
- They had not drawn down any of the Bank of England facility up to the end of last week.
- On Friday they actually had a few savings accounts opened!
Despite the FSA, The Bank of England and The Chancellor all reiterating over the weekend that The Bank of England had made a facility available to Northern Rock of whatever funds were necessary, with The Chancellor conducting numerous interviews to stress the point on various TV and radio, the fact that there were long queues again today at many, but not all, Northern Rock branches obviously means that a lot of savers don’t trust the words of our Chancellor, which says a lot about trust in politicians!
Northern Rock shares fell a further 35% today and Alliance & Leicester's fell 31% on false rumours it also had applied to the Bank of England for a loan facility. The combination of the continued run on Northern Rock and the risk that the media reporting of the fall in A&L shares would lead to a run tomorrow on A&L resulted in a dramatic announcement from The Chancellor this evening. (If a run started on a second bank the ripple effects could easily result in the situation rapidly getting out of control with unpredictable, but potentially very damaging, consequences to not only the UK, but also the global banking system.)
It was now The Chancellor’s turn to panic. Savers really had no need to, but desperate and rapidly deteriorating situations need desperate measures. In an attempt to contain the situation Alistair Darling announced this evening that the government will guarantee ALL deposits held by savers at Northern Rock. He said "Should it be necessary, we and the Bank of England would put in place arrangements that would guarantee all the deposits in Northern Rock." A Treasury spokesman added "The guarantee will be extended to any bank in similar circumstances, so long as it is solvent." It would have been helpful if, when asked, the Treasury had also confirmed they would guarantee interest payments instead of refusing to answer. This would involve a trivial sum compared with guaranteeing the deposits and so I can only assume The Chancellor hadn’t thought about it.
The extent of these guarantees is totally unprecedented and such open ended guarantees indicates how worried the Government is of the potential for the situation to spiral completely out of control. But then this is the first time a UK Government has presided over a bank run since the 19th century!
Northern Rock issued a press release late this afternoon which included the following:
- Northern Rock is not in discussion with any other party at the present time, however the Board is aware of its fiduciary duty and is actively considering all strategic options in the interests of shareholders, customers and other stakeholders.
- Any customer who paid a penalty to withdraw their funds from Northern Rock, due to concern over the current situation, will have the penalty refunded if they reinvest those funds in the same type of account with Northern Rock by 5 October 2007.
This latter point is very clever, and very PR friendly, as at least one paper tomorrow is likely to comment that Northern Rock has profited from panic stricken savers paying a penalty to withdraw their savings because they haven’t given the notice required to avoid a penalty. In the light of this offer if the public believe the new assurances from The Chancellor I suspect quite a lot of these savers will redeposit at least some of their savings once the panic dies down.
Categories: Bank of England, Mortgages, Regulation
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