Tuesday, September 18, 2007

Bank run!!!

I never thought I'd see a run on a bank in my lifetime. It seemed the stuff of black and white footage of desperate men and women in woolen suits and hats. But late last week and continuing this morning there's a run on a British bank called Northern Rock. I've heard the mood in the queue is nervous but upbeat - a bit of the old British blitz spirit. I half fancied going down to a branch just to soak in the atmosphere of this historic blip.

It all started when Northern Rock asked the Bank of England for a line of credit, because the wholesale money markets that they usually used to fund their mortgage loans was jumpy following the sub-prime mortgage market problems in the US. The Northern Rock were particularly exposed because they mostly deal in mortgages rather than a wide array of financial products and they mostly access the money markets rather than funding mortgages largely from moneys on deposit.

In the UK, deposits are only underwritten or guaranteed in full to £2000 ($4,000) and 90% of further deposits to a value of £35,000. So even relatively small time savers were at some risk.

Too little, too late?
Although the Government expressed full confidence in the bank and assured savers that there was no need to take their money out, although they could if they wanted to - there was no talk until late yesterday of extending the deposit guarantee. Shortly after the end of banking hours yesterday the Chancellor Alistair Darling (the man with the funniest eyebrows in politics) announced that all deposits would be guaranteed. But only for Northern Rock Savers and only in this crisis. Frankly, that would make me all the more nervous. It's one thing to get reimbursed through a recognised scheme, but it's another to rely on a promise at a press conference.

I think what's needed is a broader guarantee on all deposits to a reasonable level (£50 to £75k off the top of my head) for all banks and building societies (kind of like a savings and loans).


jen said...

i find this all very interesting as well - have ended up in more than one conversation recently about the FDIC. which of course is not foolproof either, but still much more comprehensive, it seems to me.

Nicole said...

I concur. Is all a bit freaky.

I am tempted to buy stock in N.Rock however on the gamble it goes up.

Vol Abroad said...

Too late Nicole - it already did. (Though it might go up a little bit more).

KathyF said...

I think this was sort of a self-fullfilling bank run. When you see people lining up, hear numbers like 2 billion being withdrawn, it makes you itch to get over there and withdraw your cash.

Pity the elderly who couldn't withdraw! They'd have been left holding the bag had not Gordo intervened.