Northern Rock run could have been avoided, says FSA chief

Generali

HAMISH_MCTAVISH wrote: »

Indeed.

It was absolutely the case that Northern Rock was not insolvent, it was however facing a liquidity crisis.

NRK was insolvent: one of the definitions of insolvency is an inability to meet liabilities. No bank is solvent given a big enough run.

HAMISH_MCTAVISH wrote: »

Lets not forget Northern Rocks "bad bank", containing the very worst of UK mortgages, made a 790 million pound profit last year alone.

That is just a profit on mortgages performing less badly than previously. It's worth setting this profit against losses for the whole of Northern Rock of £257,000,000 in 2009 and £1,360,000,000 in 2008.

The profit didn't come from cash flow, it came from a revaluation of assets in the Bad Bank's books.

HAMISH_MCTAVISH wrote: »

The correct response from day one would have been for the BOE to provide unlimited liquidity to all UK financial institutions, and then a liquidity crisis would not have turned into a solvency crisis through inaction, as ended up happening.

This whole mess could have been completely avoided.

The BoE lent £25,000,000,000 to NRK, almost £9,000,000,000 is still outstanding. That's pretty close to unlimited.

HAMISH_MCTAVISH wrote: »

It failed because it borrowed short and lent long, and no bank with that business model can survive the freezing up of global credit markets.

That's what all retail banks do. Your savings account is a short-term loan to the bank, your mortgage is a long-term loan from the bank.

JonnyBravo

Generali wrote: »

That is just a profit on mortgages performing less badly than previously. It's worth setting this profit against losses for the whole of Northern Rock of £257,000,000 in 2009 and £1,360,000,000 in 2008.

The profit didn't come from cash flow, it came from a revaluation of assets in the Bad Bank's books.

Sure but the £1,360,000,000 loss in 2008 mainly came from a revaluation of assets didn't it?

Generali

JonnyBravo wrote: »

Sure but the £1,360,000,000 loss in 2008 mainly came from a revaluation of assets didn't it?

It did. So net-net they lost about £500,000,000 over the 3 years we're discussing from declining asset values.

Those assets declined in value because default rates pretty much doubled. My guess is that they were 'kitchen sinking', that is using the worst case scenario to value the assets.

Lewis1967

Mikedkt wrote: »

The other bank runs around Europe seem to be spreading. Greece is having about a billion every day drawn out, Spain a bit less but italy even more. Reports are in Italy and Ireland banks are freezing accounts to stem the flow out. Is it time to start withdrawing cash out of our accounts to beat the rush coming to the uk? I was in the lines outside N rock and it's not nice at all. I had no cash at home and all my wages went into my account. Sudden realization can be scary.

I was not involved with Northern Rock but I knew an old couple who were and they got very worried. Now they do not keep much in any bank, its not like you are going to get any interest worth anything anyway.