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Stock Ideas Top Headlines Run on a Bank Northern Rock
Stock Ideas Top Headlines Run on a Bank Northern Rock 
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| Run on a Bank Northern Rock |
| Wednesday, 26 September 2007 | ||||||||
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London--Trader’s Talk joins you this week from London, where the big piece of news on the financial front continues to be the run on Northern Rock, Britain’s fifth-largest mortgage lender. You simply can't turn on a TV news program or pick up a newspaper that doesn’t include some interview or column attempting to explain the crisis and how it’s likely to affect the broader UK economy. This represents the spread of the US housing turmoil and credit crunch to what's certainly among the world’s most important financial centers, if not the world’s pre-eminent financial center. Most of you have probably already seen the pictures of hundreds of Northern Rock depositors queuing outside their local branches to withdraw all their savings. Northern Rock depends mainly on loans from other financial institutions for liquidity; these loans allow it to fund the mortgages it offers. The problem is that banks globally have become far more conservative about lending during the past month and a half. This is especially true for mortgages, the epicenter of the problems in the US. In the UK, the property market has continued to boom during the past year in what many believe is an unsustainable bubble. UK property prices, especially those in London itself, are among the highest in the world, and price appreciation has far exceeded that in the US. The banks that finance Northern Rock stopped lending, which quickly led to a lack of funding and liquidity for the bank. Northern Rock simply can’t continue to fund new mortgages without access to credit from other institutions. It's also the case that many companies--both financial and nonfinancial--can’t continue their operations effectively without access to credit. The governor of the Bank of England, Mervyn King, announced earlier this month that the central bank was forced to offer liquidity to Northern Rock. King, the UK equivalent of Ben Bernanke, stated that he was forced under European Union (EU) law to make this disclosure public early and couldn't act covertly to stem the panic and provide liquidity to the bank. The problem, of course, unraveled as soon as that was announced; depositors panicked, believing their savings weren't safe and that a collapse of Northern Rock would mean the loss of all their savings balances.
UK law insures the first GBP2,000 (USD4,000) in deposits and 90 percent of the next GBP33,000 (USD66,000). That means that those with GBP35,000 on deposit were guaranteed to get back about GBP31,700 (USD64,000); any amounts more than that could technically be lost. Therefore, the queues formed around the block, and the bank was forced to extend its hours and beef up staff to be able to handle all the requests for withdrawals. All of these withdrawals are, of course, being funded by emergency loans from the Bank of England itself, essentially a bailout. This isn’t totally unlike what the US Fed decided to do in August to stem the credit panic. Meanwhile, the public’s attention in the UK seems to have shifted to the Northern Rock’s plan to fund a GBP59 million (USD120 million) dividend to shareholders. In addition, it emerged last week that Northern Rock hasn’t been entirely in crisis mode. The bank made a GBP1 million (USD2 million) loan to a consumer to buy a house, requiring only a 10 percent down payment. This modern-day run on a bank is certainly unusual for a major, developed country like the UK. Therefore, it’s hardly surprising that the crisis caused some severe volatility in the UK stock and, to some extent, global stock markets. Source Excerpted from : This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
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