Don’t Panic!

! This post hasn't been updated in over a year. A lot can change in a year including my opinion and the amount of naughty words I use. There's a good chance that there's something in what's written below that someone will find objectionable. That's fine, if I tried to please everybody all of the time then I'd be a Lib Dem (remember them?) and I'm certainly not one of those. The point is, I'm not the kind of person to try and alter history in case I said something in the past that someone can use against me in the future but just remember that the person I was then isn't the person I am now nor the person I'll be in a year's time.

Northern Rock has had to take out an emergency loan from the Bank of England to restore liquidity.  The bank, which is one of the biggest mortage lenders in England, has insisted that it isn’t insolvent but this hasn’t stopped people withdrawing their savings en-masse, making the situation even worse.

One couple – a pair of former hoteliers – is staging a sit-in protest at their local branch because they weren’t able to withdraw £1m from their account which is, to be fair, an unusual and unreasonable request without giving the branch enough notice to get the cash delivered.

Northern Rock, like all banks based in the UK, will be backed by other private and commercial financial institutions.  If these backers fail to bail out Northern Rock if they do become insolvent, Northern Rock will still be able to get enough cash to satisfy withdrawals by using lender of last resort facilities from the Bank of England.  The Bank of England will automatically lend money to banks to maintain liquidity if they are unable to obtian private finance to do so.

Should Northern Rock continue to have problems with liquidity the Bank of England has the power to administer the bank in the same way as insolvency practitioners administer insolvent companies.

Realistically, there was very little risk to customers of Northern Rock until they started their panic-withdrawals.  By needlessly withdrawing their money from the bank they are depriving the bank of the capital it needs to continue day-to-day trading, making it quite inevitible that the bank will cease to become solvent.  But before this happens, it is highly likely that the Bank of England, in conjunction with other governtment departments, will stop people from withdrawing money from Northern Rock accounts under powers it has to prevent the collapse of banks and serious damage to the economy.

2 comments

  1. Northern Rock – illiquid or insolvent?…

    Was the Bank of England’s bail-out of Nothern Rock, Britain’s 5th largest mortgage lender justified on the grounds that it met Mervyn King’s parameters explained recently in a letter to the Treasury Select Committee?". . .central banks, in thei…

  2. Aaron (72 comments) says:

    Am I the only person who had never heard of Northern Rock before this whole sorry affair began? I can’t say I’ve seen a branch on any high street or business district which I am familiar with.

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