Northern Rock: rocking on?

[captainnemo]

In the sense that the press have been talking about liquidity it refers to the free movement of capital through the system and there is a problem between the major banks at all levels from clearing, down. (and it isn't restricted to this country, other major central banks have been involved in injecting money into their respective systems)

Agreed, the Bank of England is lending NR the funds to remain functional but the original NR business model was based on borrowing short-term from the capital market funds which were then lent over a longer term. Not normal practice to plan on borrowing from the Bank of England which would in any case decline to participate in such a scheme under normal circumstances because that is not the function of the Bank. And under most circumstances loans are extended on consideration of ability to repay, not the inability to borrow elsewhere.

The question people should be asking is why the Bank is having to help NR, and what sums are involved. This isn't political, it's about the system which governs the money in your pocket which is based on trust. Most of us have benefitted over the years from credit, whether in the form of loans or mortgage and those credit agreements were taken out on the basis of mutual trust.

There was always an awareness that we as borrowers might be a little adventurous in our declarations of ability to repay but NR provided the first example in decades of a major lender being put on the back foot. If people find that cause for amusement, remember that the queues of people outside NR branches weren't on the whole sad losers looking for company in the small hours. Some of them were looking to withdraw significant sums even if one questions the sense of putting so much in one basket in the first case.

On the other hand it is good to know the vis at St Abbs makes a journey worth while....but not from the South, sadly.

[Jay]

All banks borrow on short term loans - ie LIBOR - thats how finance works.

The run on Northern Rock was caused soley by the press. There is no bank in the country that has sufficient capital to repay its investors and so what happened to Northern Rock could in theory happen to any bank - all it takes is a panic induced situation to cause people to start withdrawing.

The reason why the BoE lent the money is because their primary purpose is to ensure (insure) the economy and the fall of a financial institution would have quite frankly had catastrophic consequences for all us.

Oh, and Northern Rock isn't the only instituion that has credit facilities with the BoE

Its threads like this that demonstrate why the NR crisis came about - misinformation and a lack of understanding in the finance market as a whole I'm afraid

[warmwaterdiver]

hasn't Barclays also borrowed a few quid?

[Scubee]

Originally Posted by warmwaterdiver

hasn't Barclays also borrowed a few quid?

Technically, they all 'borrow' from the BoE everyday.

[captainnemo]

The way banking works is not entirely relevant to the NR matter and it is absolutely true that none of the banks could meet their creditors' demands if even just private individuals turned up. Not a single High Street branch carries sufficient cash to pay out their local users if all turned up on say a Tuesday and wanted to pull the dosh and put it under the mattress.

Similarly it is true that the media inflamed the situation, footage of people queuing was unsettling and some of the comments from the panicking disinvestors made you wonder how they got the money in the first place.

Nonetheless, it doesn't need a degree in financial management to wonder quite how a situation as NR could be allowed to reach the position where what happened, happened. It is comforting that the Bank is in a position to shore things up (and other central banks are performing the same function) but it would be to all our benefit if the checks and balances were restored and maybe tightened.

The sub-prime market is the culprit, the genius idea of cobbling loans together for people who won't be able to make the repayments throughout the term.

[big_si]

Ever thought about taking up diving? You might like it!

I enjoyed hearing that you were back in the water with the Drager. Is always nice to read people's trip reports and successes. Let's have some more of those sort of threads instead of most of them being 'Speaker's Corner' threads?
http://www.yorkshire-divers.com/foru...archid=3480156

If not there's always more applicable fora around to flex your linguistical and political muscle...?
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My 2p... I'm off to fettle some kit!

[Jay]

Originally Posted by captainnemo

The way banking works is not entirely relevant to the NR matter and it is absolutely true that none of the banks could meet their creditors' demands if even just private individuals turned up. Not a single High Street branch carries sufficient cash to pay out their local users if all turned up on say a Tuesday and wanted to pull the dosh and put it under the mattress.

Similarly it is true that the media inflamed the situation, footage of people queuing was unsettling and some of the comments from the panicking disinvestors made you wonder how they got the money in the first place.

Nonetheless, it doesn't need a degree in financial management to wonder quite how a situation as NR could be allowed to reach the position where what happened, happened. It is comforting that the Bank is in a position to shore things up (and other central banks are performing the same function) but it would be to all our benefit if the checks and balances were restored and maybe tightened.

The sub-prime market is the culprit, the genius idea of cobbling loans together for people who won't be able to make the repayments throughout the term.

I'm still unsure of what particular point you are trying to make. After the sub prime issues in the States, UK banks decided to stop lending money to each other and this, combined with NR having to announce that they had arranged a credit facility (note FACILITY, not LOAN) and the media having a field day caused investors to start to withdraw and therefore creating a self fulfilling prophesy.

NR have a pretty solid business plan - they are one of the most innovative lenders out there and until the run occured, they had high cash liquidity.

ANY bank is days away from such an event - I can't see how it can be controlled. Banks are PLCs and are rightly allowed to run their own businesses as they see fit.

And to be honest, having financial qualifications helps understand this more than the average Joe

[captainnemo]

The current Chancellor of the Exchequer is by training a lawyer, his predecessor was a professional politician, his predecessor was originally trained as a barrister, the one before that was Norman Lamont who had actually worked in finance (and he gets blamed for the financial disasters of the early 90s) so the question of expertise at the top is slightly moot.

It will be interesting to see what the status of NR actually is in 6 months when all the fuss has died down and various heads of banks have stopped rolling (Citibank is apparently the latest...)

[chrisch]

Originally Posted by Jay

I'm still unsure of what particular point you are trying to make. ....

Some kind of reversed Turing test probably??

Chris

[captainnemo]

I don't think I've suggested it was wrong for the Bank to support NR, maintaining confidence in the financial system is after all the job of central banks. Given that other secondary banking organisations have been allowed to collapse previously, including BCCI and Barings it seems reasonable to wonder what criteria are used to a) identify what financial businesses do merit support and b) on what terms the support is offered.

Under the circumstances, with several base rate hikes and a credit squeeze it seems not unreasonable to wonder what is coming next. I can't be the only person running a fistful of credit card balances even if I don't have a mortgage to worry about...(and it was never an interest only package offered on 5X earnings over 30 years on a self-assessment declaration)

The financial picture may well be perfectly secure...it would be imprudent to take it for granted though. If the rescue package for NR results in their share price recovery and the resumption of normal business everyone will be happy.