Au contraire, the bank run was anything but irrational. The management had overextended themselves in borrowing short and lending long to such an extent that they felt it necessary to apply for emergency funding from the Bank of England to remain solvent. Hardly confidence inspiring.
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I regard the initial rush to get money out as irrational given the facts. It was primarily an emotional response to words like 'emergency funding' and the manner in which it was reported. You could argue that seeing a bank run and believing the UK government are going to allow it to bust the bank (even after having committed to stand behind it), it is then rational to want to get your money out before it's all gone. I certainly did not believe it would get that far as the political consequences would have been disastrous for the Labour government. It would have been an act of suicide. What's more it could very easily get out of control and spread like wildfire to other institutions in the wake of NR's collapse. They had to do whatever was necessary to stop the rot, and they did.
After conducting due diligence the BoE satisfied themselves that NR was indeed still solvent and approved the emergency funding. Of course this due diligence was predicated on two factors -
(1) £24 billion in deposits
(2) The 'credit crunch' being a short term phenomenon
We know (1) no longer holds and the jury is still out on (2). I think it's way too much risk to consider for what is supposed to be a safe and liquid means of storing cash. Government guarantee or not, how easy do you think it will be to get your money back if the bank goes into receivership? Are you being rewarded adequately for this potentially major inconvenience?
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But it wasn't just about the £24 billion in deposits, you're also looking at its loan book of £113 billion which is considered to be of superior quality to the UK average with numbers of mortgages three months or more in arrears only half the industry average. The Bank of England was satisfied to accept these mortgages as collateral for the funding. The FSA stated the bank exceeded its regulatory capital requirement. It seemed quite reasonable to believe that they would not have provided the funding had the bank not been solid. In a sense by the time the news broke, the danger had passed - it had got a clean bill of health and was backed by the Bank of England. Two weeks ago, when everyone was sleeping like babies thinking their money was completely safe, there was perhaps more reason for concern but it's just we didn't know about it so we weren't concerned.
Also, the only reason the £24 billion element of their assets can be called into question is because people reacted in the way they did. That was self-fulfilling.
As to what's my reward for not doing anything and keeping my cash in NR. Well, I enjoyed not having to queue for hours outside the office in Dublin for one thing and it was great not to waste the weekend trying to get through the online system to complete a transfer that would have been so slow anyway, it probably wouldn't have arrived in time to make any difference had the situation really been that bad. But more importantly, I didn't want to participate in the needless destruction of a bank that has made a massive difference to the rates savers in Ireland can expect on deposit. I've always been a satisfied customer and I valued their presence in the market greatly. Sadly, it looks like the brand is finished, its reputation irreparably tarnished by the media storm and the queues outside its doors (I know some people will argue its business model brought it on itself, but I'm talking about what precisely did the most damage to the brand in the public mind).
If Northern Rock's operation in Ireland is wound down by itself or possible new owners then it's going to have an impact on deposit rates. Why should other banks offer the rates they do at the moment if one of their biggest competitors has disappeared? Even if you don't have money in NR, its mere presence in the market was influencing the rate you receive. People say what have you to gain by leaving it there? well, we'll see what we've lost in the months and years ahead I reckon.
Lastly, it has to be said that in fairness to the people who queued and besieged the web site, their actions look likely to result in a better deposit compensation scheme from the UK authorities. Lets hope there's a UK based bank still operating here under the scheme so we can take advantage of that enhanced protection in the future.
