Bank Of England Shipwrecked On Northern Rock
Below is a MRR and PLR article in category Finance -> subcategory Wealth Building.
Bank of England Faces Challenges with Northern Rock Crisis
Summary
The UK authorities' handling of the Northern Rock liquidity crisis has been a significant embarrassment for the government, especially for Prime Minister Gordon Brown. Previously celebrated for his economic management as Chancellor, Brown's reputation has taken a hit in a matter of days.
Background
The liquidity issues at Northern Rock and other financial institutions didn't materialize overnight. The crisis was rooted in the US subprime mortgage market and the subsequent repackaging of risky debt, which was sold to banks in the UK and EU. Notably, prominent banks in Germany and Barclays in the UK are believed to hold substantial exposure to these unstable assets.
Northern Rock's Predicament
Northern Rock, an active UK mortgage lender, relied heavily on the wholesale market for 73% of its funds, with only 27% from private depositors. The subprime crisis dried up these crucial funds from UK banks and financial institutions.
The Bank of England's Response
Unlike their counterparts in the US and EU, who eased liquidity pressures in the summer of 2007, the Bank of England initially took a hands-off approach. The central bank's stance was that financial institutions shouldn't expect protection for imprudent decisions. When the Northern Rock crisis surfaced, the Bank of England and Chancellor Alistair Darling promised support, yet investors weren't reassured, leading to a bank run.
Government Intervention
The Financial Services Compensation Scheme protected some deposits, but many savers with larger sums felt vulnerable. Media coverage showed panicked depositors ignoring official reassurances, prompting Prime Minister Brown to announce full protection for Northern Rock savings on 17 September 2007. This measure successfully calmed the situation.
Reassessment of the Bank's Strategy
On 19 September, the Bank of England's Governor made an unexpected policy reversal. Previously, he stated that central banks should only intervene when the economic costs justified ignoring potential risks. This sudden change allowed all UK banks, regardless of their practices, to endure the crisis.
Key Questions
1. Could Early Intervention Have Helped?
Had these measures been in place earlier, the Northern Rock crisis might have been avoided, though the long-term impact on the UK economy would likely be negative.
2. Could Northern Rock's Issues Have Been Managed Better?
Yes, Northern Rock could have been a prime takeover target. However, the damage to its brand is now severe, making a takeover improbable.
3. Was the Bank of England to Blame?
While the Governor's reversal was embarrassing, government influence was evident. Few major UK banks have faced bankruptcy recently, though a similar lifeboat scheme in 1973 saw the Bank of England prevent a domino effect.
Conclusion
The Northern Rock saga highlights the delicate balance of the Bank of England's independence. While it seeks to align with government policy, conflicts with short-term political needs can undermine this independence. In attempting to navigate the crisis, the Bank of England found itself trapped, much like a shipwreck on Northern Rock.
You can find the original non-AI version of this article here: Bank Of England Shipwrecked On Northern Rock.
You can browse and read all the articles for free. If you want to use them and get PLR and MRR rights, you need to buy the pack. Learn more about this pack of over 100 000 MRR and PLR articles.