The weekend news has been dominated by the woes of Northern Rock.
So are we heading for a banking collapse? Well, I’m not going to answer that one, the firms PI is not large enough to cover the risk of the wrong answer….
Whats led to Northern Rock’s problems is a combination of factors; jitters on worldwide markets; American sub prime loan defaults; Northern Rocks fairly aggressive business plan of developing a lending business based on securitised lending rather than deposits from savers.
Arguably the Bank of England, if they had faith in Northern Rock, which they say they do, would have been better offering this support privately not publicly. Public scrutiny of central bank decisions is important but there arguably ought to be a provision for confidential support to be provided, with a full report later – there may still be a run on the bank with the liquidity problem when the report comes out, but it would make for a more stable environment. Pictures of savers queuing outside of Northern Rock to withdraw their life savings makes good television, bud bad economics.