Northern Rock run could have been avoided, says FSA chief

wotsthat

"I think things would have been very different if the government and the Bank [of England] had taken my recommendation that they should provide liquidity support to Lloyds to purchase Northern Rock," Mr Sants told BBC business editor Robert Peston.

Hmm. Didn't quite work out when Lloyds took over HBOS - I wonder why he thinks Lloyds taking over Northern Rock would have been that much different.

http://www.bbc.co.uk/news/business-18419434

pqrdef

Pictures of people queueing round the block were very damaging. Not only did they bring home to the public at large that banks were in trouble - people who would otherwise not have noticed - they also made it very clear that the Treasury/BoE/FSA were not on top of the situation.

A more orderly and timely handling of the situation by the authorities would have been much better for the credit ratings of the other banks - which nowadays tend to be based on assuming the bank is technically bankrupt and assessing what the government will do about it.

It's all about confidence.

MacMickster

I see that he hasn't tried to explain why the FSA allowed Northern Rock to get into the position that they were.

Their business model and mortgages over 100% of the property value were things which should have warranted FSA attention, and this would have prevented the run on Northern Rock.

DervProf

MacMickster wrote: »

I see that he hasn't tried to explain why the FSA allowed Northern Rock to get into the position that they were.

Their business model and mortgages over 100% of the property value were things which should have warranted FSA attention, and this would have prevented the run on Northern Rock.

Exactly what I was going to point out.

It's all very well for "silly old Hector" to say that he told the BoE & government that Lloyds should have bought NR, but was he banging his fist on the desk a year or two earlier, telling them that NR was heading towards trouble ?

Funny how so many are now wise after the event. If they were any good at their jobs (or less tempted to go for the easy option), then NR wouldn't have been caught with their pants down. Mind you, preventative action would have slowed down HPI, so it was a price worth paying, right ?

Generali

'The Sheeple', as the majority are so often referred these days, are not stupid. There was a real risk that NRK was insolvent so they wanted their money back pronto.

NRK effectively closed their website, a typical 'slow count'* reaction to a bank run but that just pushed people into the queues.

Of course 5 years later, everyone 'knew' that NRK was dodgy and had warned them that what they were doing was bound to end in disaster. I believe that the FSA did warn NRK that they were sailing close to the wind with their funding but !!!!!! were they going to do in reality? Remove their banking license? They were paper tigers.

Regulation only works if the regulators are stronger than the regulated.



*The 'slow count' in a bank is a way of reducing the impact of a bank run.
Customer: 'I want all my money back please'
Teller: 'Certainly Madam, would you like that in pennies or tuppences?'

DervProf

Generali wrote: »

Of course 5 years later, everyone 'knew' that NRK was dodgy and had warned them that what they were doing was bound to end in disaster.

Some of use had a very strong feeling that NR were heading for disaster a little more than 5 years ago. I "bored" one or two friends with my predictions well before (over 12 months) the credit crunch. I looked at the deals that NR were offering borrowers, I looked at their market share and share price, and came to the conclusion that it was too good to be true.

And after hearing the line "aren't hopes and dreams fragile" on the Bradford & Bingley advert, I replied to the TV "yes love, they often turn into nightmares". In those days, not many people listened to, or wanted to believe my predictions, they seemed too interested in "house prices rose 2% again last month".

wotsthat

pqrdef wrote: »

A more orderly and timely handling of the situation by the authorities would have been much better for the credit ratings of the other banks - which nowadays tend to be based on assuming the bank is technically bankrupt and assessing what the government will do about it.

The simple thing for the government to have done to prevent the run would have been to more quickly give a cast iron guarantee that deposits were secure.

Then they could have let them go bust.

pqrdef

wotsthat wrote: »

The simple thing for the government to have done to prevent the run would have been to more quickly give a cast iron guarantee that deposits were secure.

They would have to explain that. No good just saying the bank was sound. They would have to explain where the money was going to come from if the bank didn't have it.

wotsthat wrote: »

Then they could have let them go bust.

They did.

CLAPTON

MacMickster wrote: »

I see that he hasn't tried to explain why the FSA allowed Northern Rock to get into the position that they were.

Their business model and mortgages over 100% of the property value were things which should have warranted FSA attention, and this would have prevented the run on Northern Rock.

the reason they went bust was nothing to do with mortgagees failing to keep up with payments; their bad debts from loans and mortgages were about the industry average.

the reason they went bust was that their lending was funded not by boring old UK depositors but by interbank lending; so when that dried up (due to the US problems) they couldn't repay their debts.

BoE didn't want to bail them out due to moral hazard; luckily in future the BoE will be the sole authority for such matters.

michaels

So if it hadn't been for the crisis of confidence caused by the queues at NR HBOS and RBS would have been entirely sound and in no need of a bailout to acheive the amount of capital they were short.

At the time it was reported that apparently under the brilliant triparate system although the BoE wanted to give a blanket undertaking to NR depositors it did not have the tools to do so.

The NR business model did make sense if AAA rated institutions were able to borrow at small spreads over BoE base. This had always been the case so it did not occur to anyone that it might not continue to be the case. The overall fallout suggests that even with a recession much deeper than any mainstream forecast would have predicted even at the outside of its 'confidence' range NR is likeyl to pay pretty much 100p on the £ and thus it really wasn't insolvent just illiquid. (As opposed to the aforementioned HBOS and RBS)

pqrdef wrote: »

Pictures of people queueing round the block were very damaging. Not only did they bring home to the public at large that banks were in trouble - people who would otherwise not have noticed - they also made it very clear that the Treasury/BoE/FSA were not on top of the situation.

A more orderly and timely handling of the situation by the authorities would have been much better for the credit ratings of the other banks - which nowadays tend to be based on assuming the bank is technically bankrupt and assessing what the government will do about it.

It's all about confidence.

pqrdef

DervProf wrote: »

It's all very well for "silly old Hector" to say that he told the BoE & government that Lloyds should have bought NR, but was he banging his fist on the desk a year or two earlier, telling them that NR was heading towards trouble ?

But NR was just what we wanted, wasn't it? Banking for the 21st century. Thrusting management, new ideas, better products. You couldn't hold back people like that with regulatory ideas left over from the Mainwaring era, could you.