I regard the initial rush to get money out as irrational given the facts.
I guess we'll have to disagree there. When I give my money to a bank I expect the bank not to overextend itself in how much it lends out to the point that its short term liabilities cannot be met (£3bn in equity + £28 billion in deposits against a mortgage book of £113 billion, the bank was primed for a run). Nor would I expect it to be investing in the US subprime mortgage market. If I hold an instant access account then I expect it to mean just that. If any bank I hold cash with needs to apply for emergency funding from a central bank because it can no longer obtain funding from the money markets, then that tells me all I need to know about how safe my money is.
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.
Given that Mervyn King had only the day before warned about the dangers of bailing out banks which had behaved imprudently, I certainly consider it unexpected that deposits (esp. Irish deposits) would become UK public debt and Northern Rock would be effectively nationalised so quickly.
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.
If the bank is so safe why:
- Did its debt trade at implied junk bond status on the credit markets (this was before it was nationalised so NR debt is now effectively UK taxpayer debt)?
- Why did the share price plummet to below even book value for those loans you speak so highly of?
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.
Not true. If the bank goes into receivership or liquidators are appointed, there'll be a big difference in how they treat deposit accounts where a withdrawal request has been made prior to receivership and those who did not make such a request.
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).
Well it was their business model that brought it on itself. It was a faulty business model and they duped their customers. They were gone even if not one single customer requested a withdrawal. Their business model and aggressive expansion required access to a liquid ABCP market at LIBOR rates. When this market collapsed their business model was history. They couldn't run a sustainable business based on lending long term at rates below the short term rates they were borrowing at.
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.
Personally I wouldn't want to put my money at risk for an extra quarter-point interest. Their are equity and corporate bond markets where I can take such risks for greater reward.
But fair enough,perhaps some savers do. The real tragedy is in the emergence of a sort of corporate socialism, where business are not allowed to fail and losses are nationalised to be borne by the taxpayer. In the end, this merely rewards banks like NR that are profligate with the deposits with which they are entrusted, at the expense of more prudent banks.
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.
Well, that better deposit protection scheme comes at the expense of the taxpayers so my thinking is that it is unlikely to apply to Ireland.