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Bad days at Northern Rock

Tanya Powley charts the events that led to queues of panicked savers outside Northern Rock branches last week and examines how the situation could affect bank funding policy in future

Six months after Northern Rock’s share price hit a 12-month high on the back of significant gains in its mortgage market share, it has been plunged into crisis by the liquidity crunch.

The March high came after Rock’s half-year results saw it claim a 9.7 per cent share of the residential mortgage market, up from 8.7 per cent at the same time last year, but its share price of 1,258p halved to 621p by the middle of August.

The bank tried to calm fears over its exposure to the US sub-prime crisis by issuing a notice to the stockmarket stating that its total investment in US collateralised debt obligations and mortgage-backed securities represented just 0.24 per cent of its total reported assets of 113bn. It said it had 200m exposure to US CDOs and 75m to MBSs.

But on September 14, Northern Rock’s share price plummeted by 31 per cent after the revelation that it had to ask the Bank of England to provide it with emergency funding due to the global credit crunch.

The scenes of panic that followed across the country, as people queued for hours to retrieve a total of more than 2bn in savings, led the Government to pledge that it would guarantee all deposits held by Northern Rock customers.

Chancellor Alistair Darling underlined statements made by the FSA over the previous weekend, confirming that Northern Rock was solvent and had a sound long-term loan book despite its shortterm liquidity problems.

Darling said: “Should it be necessary, we, with the Bank of England, would put in place arrangements that would guarantee all the existing deposits in Northern Rock during the current instability in the financial markets.”

But mortgage brokers have laid the blame for the mass panic on the Government, the FSA and the Bank of England for failing to be a white knight to the lender weeks ago.

Robert Sterling managing director Kevin Duffy says: “If I were a shareholder in Northern Rock, I would feel pretty aggrieved with the way the Government and the FSA have handled this situation. I think it is complacency on the part of the regulator. It should have realised that the hysteria would have been inevitable.”

He says the FSA should have had confidential discussions with Northern Rock weeks ago when it was first realised it was having liquidity problems. “There should have been a white knight situation weeks ago and that would have laid the ground for more stability now,” he says.

John Charcol senior technical manager Ray Boulger says: “The key question is whether the Bank of England has handled the situation well. If it had pumped more money into the system early on, the situation would never have happened. Northern Rock perhaps would not have had to go cap in hand to the Bank of England.”

Last week, the Bank of England made a dramatic U-turn by confirming it will inject 10bn into the money markets in a bid to lower three-month Libor rates, despite its previous policy of non-intervention.

It will hold three further auctions at weekly intervals, with the amounts to be decided later, and banks can offer a wider range of collateral than is normally allowed, including their mortgage debt.

The Government’s pledge to guarantee all existing deposits appeared to quell the panic and Rocksaid eight of 10 calls that it received after Monday last week were about reinvesting money.

Boulger points out that Northern Rock has said it will refund any penalties customers have suffered by withdrawing their money, as long as they reinvest the funds into the same type of account with the firm by October 5.

The mass panic has led industry commentators to suggest that the Government could place limits on how much funding can come from the money markets.

Wave director of sales and distribution Mehrdad Yousefi expects the Government to change the funding regime to prevent a similar crisis in future. He believes the Government could stipulate how much and what type of funding can come from capital markets.

Yousefi says: “The Government will undertake a review of current funding to make sure we do not see a repeat of Northern Rock. It has been extremely unlucky and has not done anything wrong but when the international banking market grinds to a halt, if the bulk of a bank’s lending is reliant on the capital markets, it is going to create problems.”

In the meantime, the industry will be watching to see if a firm moves in to buy Northern Rock. Lloyds TSB and HSBC have both been tipped but Northern Rock issued a statement last week saying it is not in discussions with any other party at present.

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