The Time to Panic is When Those in Charge Say "Don't Panic"

Although it's been widely covered elsewhere, there's one thing worth noting about the crisis unfolding at British lender Northern Rock: it could happen here -- or anywhere else for that matter.

By definition, most banks, savings & loans, and other such operators are houses of cards that depend almost entirely on the confidence of those who entrust them with their money.

That is because virtually all of these institutions lend out far more than they have on deposit, and thus are only one step removed from crisis and insolvency if too many people decide they want their money back all at once.

That's something to think about while reading "Run on the Bank," the London Times' take on the latest troubling development in the unfolding global credit crisis.

Patrick Hosking, Christine Seib, Marcus Leroux and Grainne Gilmore
The jitters plaguing financial markets spread to the high street for the first time yesterday as thousands of panicking savers queued to withdraw millions of pounds from Northern Rock, Britain’s eighth-biggest bank.

The rush to pull out savings followed the revelation that Northern Rock had been forced to ask the Bank of England for a rescue injection of finance.

As crowds of customers demanded their money back, shares in Northern Rock slumped by 31 per cent after it alerted shareholders to its difficulties, wiping £900 million from its value. Shares in other financial institutions were also hit, with Alliance & Leicester down 7 per cent and the specialist lender Paragon Group down 17 per cent.

The Bank of England pledged to provide unspecified liquidity support to see Northern Rock through the turbulence while it worked on an orderly resolution to its problems. The bank is braced for a fresh surge of withdrawals from its 76 branches to-day and last night was planning to extend its opening hours.

Adam Applegarth, the chief executive, told The Times that he had ordered extra deliveries of cash in expectation of the deluge.

The nerves were exacerbated yesterday when Northern Rock’s computer system collapsed under the weight of online customers scrambling to transfer money out of the bank. Savers were blocked from seeing details of their accounts, including statements, when they tried to log in. A spokesman said accusations that the bank had shut down its system to prevent a drain on its finances were ridiculous.

Ministers, regulators and bankers tried to calm the panic by issuing reassuring statements that customers’ deposits were safe. The Financial Services Authority, which supervises banks, said that Northern Rock was solvent, exceeded its regulatory capital requirement and had a good-quality loan book.

Alistair Darling, the Chancellor, who authorised the rescue, said: “At the moment there is plenty of money in the system, the banks have got money . . . they are simply not lending in the short-term way that institutions like Northern Rock need.”

Sentiment soured further amid fresh evidence that house prices were starting to fall. Rightmove, the online property site, reported that asking prices slumped by 2.6 per cent last month. That followed a report by the Royal Institution of Chartered Surveyors showing the first fall in house prices in nearly two years.

Northern Rock customers fearing for their savings filled branches across the country, with some queues stretching down
the street. At one London branch, customers queued for more than an hour. Wil-liam Gough, 75, said he did not believe the bank’s assurances that his savings were safe. “They’re telling us not to worry, but we’ve heard it before, with Marconi,” he said, referring to the collapse of the telecoms firm in 2002.

Another saver, Gary Diamond, said: “I don’t want to be the mug left without my savings.”

Another customer, an elderly woman, said that she could not afford to take any chances. “It’s my life savings we’re talking about, my pension. I’ll have nothing left if they go under.”

A retired hotelier and his wife barricaded the Cheltenham branch manager in her office after being told that they could not withdraw £1 million savings without notice. The situation was resolved only when police officers arrived to calm the couple down.

The British Bankers’ Association said: “Everyone should calm down and refrain from making simplistic comments in a very complex area which just causes unnecessary worry and concern. Northern Rock is a sound and safe bank and there is absolutely no reason for either mortgage customers or savers to worry.” It is the first time that the “lender of last resort” facility has been used since the Bank of England set up the present system in 1998. Other banks, including Barclays, have called on the Bank of England for overnight funding in recent weeks, but using the lender-of-last-resort facility is regarded as a much more serious step.

Sources at the Bank emphasised that Northern Rock would pay a penal rate of interest on any borrowings and would have to lodge assets as security.

Many financial institutions have been hit by a sudden shortage of cash and other liquid assets as banks hoard money in anticipation of having to provide finance to complex investment vehicles. Triggered initally by defaults by poor Americans struggling to meet increased mortgage bills, the problem has spread.

Northern Rock has been hit particularly badly because it relies much more on funding from wholesale investors, who have been paralysed by the credit crunch, rather than ordinary depositors. But it also risks being accused of overaggressive lending after lifting new loans by 43 per cent in the first eight months of 2007.

Around 85 per cent, or £24.7 billion, of Northern Rock’s business comes through mortgage brokers. National Savings & Investments, the govern-ment-backed savings institution, said that it saw a 20 per cent jump in the number of inquiries yesterday, the majority from Northern Rock savers.

Northern Rock has around £24 billion of customer deposits, though some of the money is locked up for months in long-term accounts. It said yesterday that it still expected to make an underlying profit of £500-540 million this year.

Comments

[Paul]

I wonder if you have noticed the situation in New Zealand. Here, eight finance companies have gone into liquidation this year. One, Bridgecorp was a major property development finance vehicle. Others have tended to be retail lenders at the hight-risk consumer credit end of the market. Much of this could be ascribed to appallingly lax regulations about how finance companies are controlled. Whatever the particulars one may blame, it seems to me to be symptomatic of the same consumer credit mentality we see everywhere else. Namely selling debt as a way to acquire things we cannot actually afford. Sooner or later this leads to a crunch, as the chickens of this silly delusion hatch. I'd be very surprised if we have seen the last of this in New Zealand

[Duric]

hi,
we have to ask ourselves the most important question:
crises and panic are just a part of the so successful plan ?

best regards,
duric
http://cromalternativemoney.org/news.html

[Harleydog]

Michael

We are witnessing the breaking of the back of confidence/psychology of this market and once broken will take years to repair. We only need look to the tech bubble of late for evidence.

The pound sterling breaks hard on the COE/Mervyn King bailout stance reversal(re: NorthRock) and continues today. The forex markets get it, the credit markets get it, yet the equity markets continue their denial, and blind embrace in a myth which according to sociologists is a belief held and is accepted on faith rather than on examination of the relevant facts and evidence.

Cheers

[raf]

and now today the BOE has basically underwritten Northern Rocks deposits and by inference the entire system.

Nice to know the lunatics are in charge of the asylum. As Fred Harrison pointed out in "Boom,Bust", this has happened every 18 years as far back as records go. I quite enjoyed the story about the City of Liverpool being bailed out by the BOE back in 1794.

Let;s face it, our money system is corrupt and built to fail so wealth can be transfered to those in power at the time.

Will this time be any different? Just look at who runs the show and you get your answer. The one difference is the rise of complimentary and alternative currency systems. If our elected representatives continue to allow the private credit system to drain us dry then we will need to look elsewhere.

[samuel]

no one is too big to fail. only when troubled financial companies are allowed to fail will the situation return to normal. The BOE made a big mistake and will live to regret their decision.

[asdf]

What is anyone here doing to protect themselves. Euros? Franc?

[jim collins]

(1) What kind of moron goes to a bank and expects to be able to withdraw one million in cash?
(2) What kind of moron keeps one million in a single bank?
(3) Does England have anything like the FDIC to insure deposits to a certain amount?