Fear is a powerful force and was evident last week in the UK when thousands of customers made a ‘£1 billion run’ on the embattled Northern Rock bank fearing it could collapse after the Bank of England was forced to step in.
In Cheltenham, Gloucestershire, the local police were called when two joint account holders barricaded a bank manager in her office after she refused to let them withdraw £1 million from their account.
The crisis in the UK is far from over yet – with the butterfly that flapped its wings in the central states of the USA potentially being felt as a hurricane in Britain.
Intrigued by developments, CoreData Research UK spoke to two retail bankers in the relatively un-exciting area of semi-rural East Anglia.
Both admitted to having loans on their books that may become a problem and both revealed it wasn’t just home owners that were going to be feeling the pinch.
As one banker said: “I have about seven businesses on my books that basically are being kept afloat by the cheap credit we are able to supply them using their home as a line of credit and that anomaly is about to disappear.”
The first head of state to start bailing out banks in danger of going bust was the 31st President of the US, Herbert Hoover.
In the throes of the American depression Hoover pumped money into small and regional banks to keep them afloat and money flowing to try and alleviate the effects of a lack of cash.
The Americans did it again in the 1980’s under Ronald Reagan when the Federal Reserve formed the Resolution Trust Corporation, which was used to inject $180 billion (about 3.2% of GDP) to prop up the savings and loans industry, which had a very similar problem.
But now it seems while the Federal Reserve isn’t rushing in to bail out its banks and sub-prime lenders, its counterpart across the Atlantic – the ‘The Old Lady of Threadneedle Street’ aka, The Bank of England – is standing up.
Last Thursday (September 13th) the Bank of England was forced to step in and bail out Northern Rock, the ex-building society come bank and one of the UK’s top 10 Mortgage lenders.
Northern Rock, who’s magenta square logo adorns the black and white vertical stripes of the ‘Geordie’ Premier League Newcastle Football Club, began having trouble in June when it struggled to raise money in the US money market when liquidity started to dry up.
The problem for Northern Rock is that while it is solvent, it has some liquidity issues because a very high proportion of the bank’s assets are held in mortgages, not cash or savings.
As you all know, this is interesting because low cost providers in the UK and elsewhere relied on raising money in the second tier markets in the USA and Europe – effectively using the liquidity of other savings banks, and are now finding it harder and more expensive to get their funding.
The Northern Rock tried to effectively buy their way out of trouble by raising their interest rates, but it wasn’t enough and the Bank of England had to step in and pump liquidity into the system.
This news however didn’t stop savers from queuing outside Northern Rock banks all around the UK to get their savings back. When the news broke in the UK, it was estimated that £1 billion was withdrawn by customers that day, about 5% of the total bank deposits held by the business – frankly an extraordinary amount of cash.
Last week UK mortgages hit a nine year high when Abbey National bumped up its tracker mortgages to 7.8%.
But it gets even more interesting, because according to figures released by the Bank Of England over the next few months more than a million borrowers in the UK will come off their cheap 4.5% fixed rates and be forced to renegotiate their loans at a new 7.8% rate or higher.
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