Northern Rock & Giant Space Rocks......

theEnd

HAMISH_MCTAVISH wrote: »

Sure.

But at the time, they weren't the only ones.

2-3p in reserves per £ of liabilities was common.

And ultimately it wasn't the quality of their loan book or assets that toppled them.

But rather a once-in-a-lifetime external event.

Their reserves being low was an internal event. At 2%, they only needed a very small amount of defaults before they were insolvent.

Not only that, but they were lending long and funding short. Was a recipe for disaster and I mostly blame the regulators.

Whatever happened anywhere in the world, these banks were doomed.

The fact that they were all leveraged so far, meant the money supply had increased so much, but without the corresponding wage inflation, the debt could never be paid back.

The crash wasn't a one off, random, externally caused event. It was a certainty, just a matter of time.

Generali

theEnd wrote: »

they were lending long and funding short.

All banks do that though. When was the last time you saw a 25 year fixed savings account?

michaels

The old illiquid or insolvent question again.

There is an argument that you make your own luck, if as a bank you are perceived to be extremely solvent then you are less likely to end up illiquid - look what happened to HSBC during the crisis, they were perceived as a safe haven for savers and thus never had a problem with illiquidity.

theEnd

Generali wrote: »

All banks do that though. When was the last time you saw a 25 year fixed savings account?

Agreed, but they generally issue some long term bonds. NRK were the worst funding from very short term markets. Savers were a very small part of their accounts.

theEnd

michaels wrote: »

The old illiquid or insolvent question again.

There is an argument that you make your own luck, if as a bank you are perceived to be extremely solvent then you are less likely to end up illiquid - look what happened to HSBC during the crisis, they were perceived as a safe haven for savers and thus never had a problem with illiquidity.

All banks are illiquid all of the time. Normally not an issue and technically they've always been entitled to go to the BoE if everyone turned up for their deposits at the same time.

The problem is insolvency. When you have possession of 2% of what you've borrowed (savers, bond holder, short term money market deals), you only need very few of those you've lent to (mortages, loans etc) to default and you no longer even have the illiquid assets to pay back what you owe.

HAMISH_MCTAVISH

theEnd wrote: »

When you have possession of 2% of what you've borrowed (savers, bond holder, short term money market deals), you only need very few of those you've lent to (mortages, loans etc) to default and you no longer even have the illiquid assets to pay back what you owe.

The problem with that statement, is that this is not what happened to Northern Rock.

Northern Rock did not fail because of defaults on it's loan book.

Northern Rock failed because of liquidity problems.

grizzly1911

HAMISH_MCTAVISH wrote: »

The problem with that statement, is that this is not what happened to Northern Rock.

Northern Rock did not fail because of defaults on it's loan book.

Northern Rock failed because of liquidity problems.

Because it have over extended itself.

I worked on a securitisation project running up to the mid noughties it was an accident waiting to happen.

HAMISH_MCTAVISH

michaels wrote: »

The old illiquid or insolvent question again.

Indeed.

My point however, is that a liquidity crisis can rapidly cause a solvency crisis.

And that the only way to absolutely, 100%, guarantee we never have another banking crisis is to never let banks lend money.

The 2007 banking crisis required a confluence of events so vanishingly rare that as Viva pointed out earlier, the statistical probability of it all happening at once was on a par with the return of the dinosaurs.

There is an argument that you make your own luck, if as a bank you are perceived to be extremely solvent then you are less likely to end up illiquid - look what happened to HSBC during the crisis, they were perceived as a safe haven for savers and thus never had a problem with illiquidity.

Even HSBC had to use emergency credit lines from central banks, and the quality of their UK residential mortgage book was little different to that of Lloyds or RBS for example.

But yes, I take your point that they were perceived to be safer largely because of significant Asian deposits.

There is another argument that you can eliminate the risk entirely of perception trumping reality or liquidity crises causing solvency crises, as happened to NR, by ensuring all banks can access unlimited emergency funding from the BOE.

Central banks are the most powerful financial entities on earth, fully capable of ruthlessly crushing negative perceptions around solvency through deploying unlimited amounts of funding.

HAMISH_MCTAVISH

grizzly1911 wrote: »

I worked on a securitisation project running up to the mid noughties it was an accident waiting to happen.

Nothing wrong with securitisation.

Provided the BOE fulfil their obligation as lender of last resort to maintain liquidity in times of crisis.

Graham_Devon

This thread needs some context applied.

Car accidents happen. We do our best and spend lots of money trying to prevent them. The only way you can irradicate them is to irradicate the car.

That does not mean though, that we shouldn't do our best to minimise the impacts when a car does crash and instead just abandon trying to reduce the impacts and fatalities. That includes removing known problem cars from the road.

Same with Northern Rock and Space Rocks. While we can't irrdaicate the problems each had, we can do our best to minimise the impact of such a problem.