Northern Rock bailed out by Bank of England

Afuera said:
You seem to be suggesting that the BoE will provide support to NR indefinately... I'm sure the EU and competitor banks will just love that :rolleyes:
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No, not indefinitely. Until such time as a takeover is sorted out or the bank has resolved its funding difficulties (through the restructuring and sale of some of its assets perhaps). The point is you're not going to see Northern Rock collapse in the months ahead if for no other reason than nobody wants to hear that news broadcast round the world after all that's already happened. It's not just the UK government and the Bank of England but the wider banking sector as well. There is great embarrassment about the way the whole affair was handled and the fact it got as far as a bank run. Many believe it has damaged the UK's reputation as a financial centre and the last thing they'll want is for it all to blow up again. Besides the bank is solvent and the loan book is of high quality. There's no reason for the affair not to be resolved in an orderly manner even if at the very worst the business was to go into run-off.
 
Sunny said:
The two German banks that were bailed out earlier this year got state aid because they were insolvent until the German State stepped in and gave them capital, not just liquidity and the EU didn't get involved.
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The two German cases earlier this year were considered to be industry aid rather than state aid since the banks in trouble were bought out by other German banks. The case in the UK is different since the BoE, in its role as a central bank, is simply providing hand outs to keep NR going long enough until it either gets bought out or goes bust. If a competitor had the capacity to buy NR, or if they had a short position on it, it wouldn't take much for them to cause the BoE to withdraw its support.
 
Afuera said:
The two German cases earlier this year were considered to be industry aid rather than state aid since the banks in trouble were bought out by other German banks. The case in the UK is different since the BoE, in its role as a central bank, is simply providing hand outs to keep NR going long enough until it either gets bought out or goes bust. If a competitor had the capacity to buy NR, or if they had a short position on it, it wouldn't take much for them to cause the BoE to withdraw its support.
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Bafin brokered a deal with the German government that state bank KfW would guarantee €8 billion of obligations for IKB stemming from an investment fund IKB managed. This was designed to prevent the bank being forced into a fire sale of its investments.
Subsequently KfW put up the lion's share of the €3.5 billion rescue fund set up to cover IKB's likely losses when IKB does sell its investments.

In the case of Sachsen, the German savings banks association had to step in and take over a €17.3bn credit facility to a special investment conduit, that Sachsen LB had funded and managed.
 
Sunny said:
What state aid?? They lent money to Northern Rock at above market rates. They didn't just hand over £10bn and say see you later chaps.
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At the time the market was unwilling to lend money to NR at any rate.

Whether it is classed as state aid or not, it is reckless for central banks to continue to reward imprudent behaviour. And quality loan book or not, NR's business was so heavily leveraged and dependent on revolving short term financing that it can only be considered imprudent.

Imagine if you ran a sensible business and a competitor emerged and undercut your product to gain market share. You felt your competitor couldn't sustain his prices or his generous credit terms to customers, so you deigned to wait until he went bankrupt. You would then be in a position to win his market share.

Now how would you feel if after your competitor did go bankrupt as predicted the government decided to loan them money and vow that no creditor would be left unpaid until the business got back on its feet?

Might other businesses decide it was profitable to trade recklessly?

In a capitalist system businesses must be allowed to fail.
 
room305, What do you think of the point Philip Richards makes [broken link removed] about the whole issue of short-term financing being used to fund long-term lending?

Sir, The crisis surrounding Northern Rock poses real questions for the future of banking in the UK. The main question concerns asset/liability mismatch. In the fund management business we understand this well ... only invest in less liquid assets if you have a time lock-up from your own investors. However, it is surely the main purpose of banking precisely to take short-term funding and recycle it into long-term lending. Arguably it is the most important foundation of a modern, prosperous economy. Nobody who needs a 20-year mortgage, or industrial loan, wants to wait in vain for a 20-year depositor to be found. Therefore, a central bank is charged to be lender of last resort because this asset/liability mismatch is always at risk of detonating in the banking system.
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It is not obvious why a funding crisis alone, in the absence of poor lending practices, should be allowed to threaten Northern Rock and its shareholders
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Is it not reasonable to punish over-reliance on the money markets and neglecting liquidity risk through a penalty rate of interest rather than to see a solvent business forced to close? One can hardly argue that NR or its shareholders have got off scot-free from all of this. Isn't that punishment enough?

Banks that engage in reckless lending and end up with a dodgy loan book are a different matter of course. Or do you not see a distinction between the two cases?
 
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Re : Northern Rock - made £100m on penalty fees, that savers were forced to pay in last months run. Surely they can't be that clever...if reported before sorry...thread very long.:(

[broken link removed]
 
Nemesis said:
room305, What do you think of the point Philip Richards makes [broken link removed] about the whole issue of short-term financing being used to fund long-term lending?
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Philips Richards is being rather expediant in how he represents the situation. Borrowing short to lend long is risky. Yet NR did so in an enormously aggressive manner in a bid to win market share. This leveraged the company hugely - no matter how prudent their lending criteria, their mortgage book is huge compared to either their equity or deposit base.

I'm certainly not the only person who thinks their business model was reckless, dependent on easy short term financing terms and a rising asset base.

Mike Shedlock
If Northern Rock goes out of business it will have been strangled by stupidity not "circumstances". Borrowing short to lend long on mortgages in the face of a known housing bubble is just plain stupid.
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Jim Jubak
[A]s long as the capital markets are willing to lend the mortgage companies the short-term funds that they will turn into long-term mortgages, and as long as the capital markets are willing to buy the securitized mortgages so that the mortgage lender can get the mortgages it has written off its hands and free up its capital again.

This system contains the seeds of its own destruction, however. It encourages lenders to run faster and faster. The more money they can put out in mortgages, the more mortgages they can sell or securitize, the more money they can free up for new mortgages, the more mortgages they can write, and on and on. Growth in deposits can't possibly keep up with this growth in the mortgage portfolio. So leverage at the lending institution grows and grows.
Northern Rock's loan book is 3.1 times its deposit base, for example. And, because loans are growing far faster than deposits, the bank's reliance on the capital markets increases as well. At the end of 2006, about 73% of the funding for mortgages at Northern Rock came from the capital markets. In the first half of 2007, its dependence had climbed to 85%.

That dependence is intrinsically dangerous because it is based on a mismatch between the lender's short-term liabilities, its borrowings in the commercial-paper market and other short-term markets, and its long-term assets, the 30-year mortgages that back the lender's debt.
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[broken link removed] explains it in an article about vehicles that have been similarly invested, the conduit or Structured Investment Vehicle (SIV) but he has made similar comments about NR's business model
But I was made to learn the golden rule of banking: lend short, borrow long.

In other words, make sure that the loans you make to your customers are due to be repaid to you before you have to pay back your own creditors.
Certainly not the other way round. I have to admit not being fully aware of these financial ‘products' until relatively recently, but they've been giving credit markets the jitters essentially because they've broken the banker's golden rule.
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Nemesis said:
Is it not reasonable to punish over-reliance on the money markets and neglecting liquidity risk through a penalty rate of interest rather than to see a solvent business forced to close? One can hardly argue that NR or its shareholders have got off scot-free from all of this. Isn't that punishment enough?
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This is only a penal rate of interest in relation to what the market is willing to lend other banks. We don't know what the market rate for NR is. Yes, the shareholders have been punished severely but remember, the same management team is still in place. What kind of message does that send out?

Nemesis said:
Banks that engage in reckless lending and end up with a dodgy loan book are a different matter of course. Or do you not see a distinction between the two cases?
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It would be even less palatable if this was a bank engaged in reckless or downright fraudulent lending. However, hundreds of businesses fail when market circumstances or trading conditions change. Often through no fault whatsoever of the management. Yet the central bank never sees fit to extend emergency loans to prop up these companies. Why is that?
 
In light of the latest guarantee regarding even new accounts I`ve decided to open an account with northern rock. The bottom line is... I have money to deposit....best rate at present is northern rock and an unrivalled guarantee...so here goes 20k. ;)
 
ClubMan said:
Not true. Check the Financial Best Buys forum. Rabo's 5% on up to €10K and First Active's 5.22% on up to €15K trump NR's rate.
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Point taken Clubman but first active drops to 4.33% on amounts above 15k and rabo has the 10k ceiling ( it drops to 3.75% afterthat ) whereas northern rock does not.
 
room305 said:
This is only a penal rate of interest in relation to what the market is willing to lend other banks. We don't know what the market rate for NR is. Yes, the shareholders have been punished severely but remember, the same management team is still in place. What kind of message does that send out?

It would be even less palatable if this was a bank engaged in reckless or downright fraudulent lending. However, hundreds of businesses fail when market circumstances or trading conditions change. Often through no fault whatsoever of the management. Yet the central bank never sees fit to extend emergency loans to prop up these companies. Why is that?
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To be fair to the management, what have they done wrong? They had a transparant business model that they followed agressively. It was always a dangerous model and the market knew that but shareholders were quiet happy to invest in it and banks were quiet willing to lend to it. Nothern Rock will fail. It won't survive as a stand alone, its business model is dead, its management won't be there when it is taken over, shareholders have been severly hit and some junior bondholders stand to lose alot of money depending on what sort of takeover happens. Personally I think that is punishment enough. I don't see the need to punish pensioners for putting their savings in the bank by letting NR go insovent by not providing liquidity to teach the market a lesson when the FSA is just as culpable for not doing appropriate stress tests on the bank.
 
iggy said:
Point taken Clubman but first active drops to 4.33% on amounts above 15k and rabo has the 10k ceiling ( it drops to 3.75% afterthat ) whereas northern rock does not.
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Yeah - but you have €20K to deposit so stick €10K in Rabo and €10K in FA and you get the best overal lump sum demand deposit rate on offer. Combine this with something like a 7% regular saver account (EBS seems to have the fewest restrictions but check the terms & conditions of each especially for access, rate guarantees etc.) and you could earn even more interest.

Note that over €15K and FA drops to 4.22% on the lot while over €10K Rabo drops to 3.75% on just the excess balance over €10K.
 
best rate at present is northern rock
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But it is, for amounts in excess of €25k (10K in Rabo & 15K in FA). I was quite perplexed by the herd mentality of so many of the financially savvy in the mad rush to withdraw their savings but I must admit I did succumb to joining them when I discovered even ClubMan was amongst them! No offence / patronage intened.
 
I see that control of The Finger Of Blame is still being fought over. Northern Rock's board seem to have gained control of it for a while and made a show of pointing it at the BBC and Robert Peston. Peston responded here:

http://www.bbc.co.uk/blogs/thereporters/robertpeston/2007/10/the_rock_and_me.html

...after which lots of people felt the need to respond themselves, in the comments section, many with variations on the "You smell" argument.

It is interesting, or maybe just depressing, to see how many people apparently have no hesitation in pinning all of the blame for the NR situation on the BBC and on one of its reporters in particular.
 
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