Bank Of England To Bail Out British Bank

[pointofview]

I disapprove of the concept of "get your money out" under these circumstances because it makes no sense. I am also pretty amazed at the way NR's customers are behaving currently by making a run on the bank. The facts are that a) the bank is highly solvent and has assets that exceed its liabilities. the Bank of England has provided lending support to the tune of £4 bill, and c) even on the first day of this so called crisis, two major lenders have offered their services as white nights. Perhaps this is just lemming behaviour on the part of customers and of some posters on TV.

This is a big, big run on this bank/building society. I have personaly witnessed events in my local branch. Ques all day with people closing their accounts - many mature investors withdrawing large amounts from 20 ot 500k. People just dont believe official reassurances. People know that suits (esp politicians) are not to be trusted - read weapons of mass destruction in Iraq.

[LaoPo]

I disapprove of the concept of "get your money out" under these circumstances because it makes no sense. I am also pretty amazed at the way NR's customers are behaving currently by making a run on the bank. The facts are that a) the bank is highly solvent and has assets that exceed its liabilities. the Bank of England has provided lending support to the tune of £4 bill, and c) even on the first day of this so called crisis, two major lenders have offered their services as white nights. Perhaps this is just lemming behaviour on the part of customers and of some posters on TV.

This is a big, big run on this bank/building society. I have personaly witnessed events in my local branch. Ques all day with people closing their accounts - many mature investors withdrawing large amounts from 20 ot 500k. People just dont believe official reassurances. People know that suits (esp politicians) are not to be trusted - read weapons of mass destruction in Iraq.

People might not believe Politicians and right so, but this is different.

I'm not even British myself but I have great confidence in the decisions of the top at the Bank of England. We're talking here about extremely well informed and qualified 'Haute Finance' people who know what they're doing. They're not Santa Claus dropping a bit of money here and there.

It's the 'sensational' news, fed by the press and other media plus the fact that is was a very rare decision by the BoE, (but explainable if one looks at the momentum of the subprime mess) which created panic amongst savers with Northern Rock.

IMHO there's nothing serious going on. IF Northern Rock would have been in really bad shape and on the way to bankruptcy the BoE would NOT have stepped in at this stage.

However I think it is needed that the BoE and/or the Ministry of Finance in the UK gives a clear signal during the weekend in order to prevent further turmoil and withdrawals next Monday.

If these 'withdrawals' would spread to other Banks...yes, than Britain is in deep trouble. Let's hope in won't go that way.

LaoPo

[lannarebirth]

Are they still giving those interest only and 50 year mortgages in the UK? Maybe someone just realized the borrower won't live long enough to pay the mortgage off.

[endure]

You can still get interest free mortgages in the UK but I've never heard of a 50 year mortgage. The maximum time is usually 25 years.

[Carmine6]

I disapprove of the concept of "get your money out" under these circumstances because it makes no sense. I am also pretty amazed at the way NR's customers are behaving currently by making a run on the bank. The facts are that a) the bank is highly solvent and has assets that exceed its liabilities. the Bank of England has provided lending support to the tune of £4 bill, and c) even on the first day of this so called crisis, two major lenders have offered their services as white nights. Perhaps this is just lemming behaviour on the part of customers and of some posters on TV.

This is a big, big run on this bank/building society. I have personaly witnessed events in my local branch. Ques all day with people closing their accounts - many mature investors withdrawing large amounts from 20 ot 500k. People just dont believe official reassurances. People know that suits (esp politicians) are not to be trusted - read weapons of mass destruction in Iraq.

This is probably where the Bank of England didn't play this right because in banking, perception can become reality. They might have to take the weekend and come up with a way to restore confidence. And I don't mean a press release, I mean talking to the heads of other banks who should realize what a run on this institution would mean. Shouldn't be hard to get someone banks to step up and provide some liquidity.

Then after all this is done, they really need to look at those deposit guarantees. Way too low. In the US it is $100,000 per person or account at each institution and it is possible to have more than that guaranteed by having different combinations of individual and joint accounts at one institution.

Edited September 14, 2007 by Carmine6

[Carmine6]

You can still get interest free mortgages in the UK but I've never heard of a 50 year mortgage. The maximum time is usually 25 years.

What's an interest free mortgage?

Edit: Oh never mind. I guess it means interest only, didn't follow the thread.

Edited September 14, 2007 by Carmine6

[chiang mai]

I disapprove of the concept of "get your money out" under these circumstances because it makes no sense. I am also pretty amazed at the way NR's customers are behaving currently by making a run on the bank. The facts are that a) the bank is highly solvent and has assets that exceed its liabilities. the Bank of England has provided lending support to the tune of £4 bill, and c) even on the first day of this so called crisis, two major lenders have offered their services as white nights. Perhaps this is just lemming behaviour on the part of customers and of some posters on TV.

1) It won't be highly solvent if the account holders all take their money out.

2) A bank's assets (its loans) are longer term than its liabilities (deposits). The asset/liability time mismatch is a structural risk of banking.

"We don't have the money, its tied up in your farm Joe, and Frank's farm" James Stewart - Its a wonderul life

[LaoPo]

I disapprove of the concept of "get your money out" under these circumstances because it makes no sense. I am also pretty amazed at the way NR's customers are behaving currently by making a run on the bank. The facts are that a) the bank is highly solvent and has assets that exceed its liabilities. the Bank of England has provided lending support to the tune of £4 bill, and c) even on the first day of this so called crisis, two major lenders have offered their services as white nights. Perhaps this is just lemming behaviour on the part of customers and of some posters on TV.

This is a big, big run on this bank/building society. I have personaly witnessed events in my local branch. Ques all day with people closing their accounts - many mature investors withdrawing large amounts from 20 ot 500k. People just dont believe official reassurances. People know that suits (esp politicians) are not to be trusted - read weapons of mass destruction in Iraq.

People might not believe Politicians and right so, but this is different.

I'm not even British myself but I have great confidence in the decisions of the top at the Bank of England. We're talking here about extremely well informed and qualified 'Haute Finance' people who know what they're doing. They're not Santa Claus dropping a bit of money here and there.

It's the 'sensational' news, fed by the press and other media plus the fact that is was a very rare decision by the BoE, (but explainable if one looks at the momentum of the subprime mess) which created panic amongst savers with Northern Rock.

IMHO there's nothing serious going on. IF Northern Rock would have been in really bad shape and on the way to bankruptcy the BoE would NOT have stepped in at this stage.

However I think it is needed that the BoE and/or the Ministry of Finance in the UK gives a clear signal during the weekend in order to prevent further turmoil and withdrawals next Monday.

If these 'withdrawals' would spread to other Banks...yes, than Britain is in deep trouble. Let's hope in won't go that way.

LaoPo

Usually I don't quote my own posts but after reading the article below and in the light of my own signature (... ) I would like to 'soften' my own opinion a bit about Northern Rock because of this article:

Northern Rock's stony path

Authorities are trying to play down the significance of their intervention, but the bank was operating at the riskier end of an increasingly risky market.

The rescue operation for Northern Rock will have wide economic and political implications even if the immediate crisis of liquidity is successfully stemmed by the emergency loan from the Bank of England.

The authorities are trying to play down the significance of their intervention, arguing that the bank is basically very sound and that any problems are entirely a consequence of loss of confidence and a drying up of liquidity, following the sub prime crisis in the US. Yet, investors have been worried about Northern Rock for months. And despite claims that it has a solid book of mortgage assets the truth is that it has been operating at the riskier end of an increasingly risky market, with loans that are a multiple of income way in excess of normal prudent levels (though that can also be said of much of UK retail banking).

The press reports that the Bank of England is "bailing out" the bank are seriously misleading - or, at least I hope so! The Bank is providing emergency liquidity at a penalty interest rate and is thereby protecting depositors and stemming a run on the bank. It is right to do so. But how does this action square with the governor's insistence that he will not indulge imprudent lending by the City and risk "moral hazard"? I think the actions and the words are consistent. There is a difference between providing emergency liquidity - which is sensible and appropriate - and rescuing shareholders from losses incurred by imprudent investment - which is not. The taxpayer should not foot the bill for the folly and greed of financial institutions.

There will undoubtedly be knock-on effects on the economy. We were already approaching an economic turning point where the credit boom of heavy personal borrowing against booming house prices was likely to slow or go into reverse. Personal debt levels in relation to income had already reached unprecedented levels; debt service in relation to income has been at worrying levels last seen in the early 1990s; house prices have escalated to silly levels which could not possibly be sustained.

To this cocktail of potential instability is now added an incipient slowdown in the US and a febrile mood in UK financial markets. If these, together, cause a UK slowdown, or even recession, there will then be growing problems of debt service by personal borrowers, and a vicious circle of declining confidence and slowing activity. The traditional response of an interest rate cut may not be available if inflation remains relatively high because of international factors such as oil and grain prices.

Politically, this crisis - if that is what it becomes - raises the basic question of why Gordon Brown was so complacent for so long about the emerging personal debt problem and the precarious dependence of the economy on confidence engendered by a housing bubble. Alistair Darling is now telling banks to engage in some more cautious lending. Three years too late. And if there is a recession Labour will take a political hammering just as it benefited for a decade from the feel good effect of an apparently endless boom.

http://commentisfree.guardian.co.uk/vincen...stony_path.html

LaoPo

Edited September 14, 2007 by LaoPo

[roamer]

I disapprove of the concept of "get your money out" under these circumstances because it makes no sense. I am also pretty amazed at the way NR's customers are behaving currently by making a run on the bank. The facts are that a) the bank is highly solvent and has assets that exceed its liabilities. the Bank of England has provided lending support to the tune of £4 bill, and c) even on the first day of this so called crisis, two major lenders have offered their services as white nights. Perhaps this is just lemming behaviour on the part of customers and of some posters on TV.

This is a big, big run on this bank/building society. I have personaly witnessed events in my local branch. Ques all day with people closing their accounts - many mature investors withdrawing large amounts from 20 ot 500k. People just dont believe official reassurances. People know that suits (esp politicians) are not to be trusted - read weapons of mass destruction in Iraq.

People might not believe Politicians and right so, but this is different.

I'm not even British myself but I have great confidence in the decisions of the top at the Bank of England. We're talking here about extremely well informed and qualified 'Haute Finance' people who know what they're doing. They're not Santa Claus dropping a bit of money here and there.

It's the 'sensational' news, fed by the press and other media plus the fact that is was a very rare decision by the BoE, (but explainable if one looks at the momentum of the subprime mess) which created panic amongst savers with Northern Rock.

IMHO there's nothing serious going on. IF Northern Rock would have been in really bad shape and on the way to bankruptcy the BoE would NOT have stepped in at this stage.

However I think it is needed that the BoE and/or the Ministry of Finance in the UK gives a clear signal during the weekend in order to prevent further turmoil and withdrawals next Monday.

If these 'withdrawals' would spread to other Banks...yes, than Britain is in deep trouble. Let's hope in won't go that way.

LaoPo

When I started this thread I stated that the mods would no doubt delete it as not Thailand related...though for some reason Countrywide was, it ended here. Maybe when the fallout from this starts to become apparent that will make the news clippings.

Whatever.

Despite claims to the contrary, Northern Rock is a bank, not a building society. It is regulated by the BOE to conduct banking business in the same way as any other bank. Nationwide for example is a building society existing within a different financial regulatory system, more than 70% of its loans are backed by savers deposits, different kettle of fish entirely.

Maybe I belong to the Jeremy Paxman school in that when I listen to a politician speak I think "why is this b**stard lying to me ?" So I don't believe all of this crap that this is a sound institution with temporary liquidity problems or the BOE wouldn't have stepped in. GET REAL. If that were the case then they would have been able to raise money on the markets, albeit at a higher rate, but still lower than the penalty rate from the "lender of last resort"..the BOE.

The Bank stepped in purely to attempt, mark my words, attempt to stop the turmoil in the markets, and it will not work. Savers will continue to draw their money out if for no other reason distrust of politicians here in the UK is higher than almost anywhere else in the developed world.

Lets get away from this. Ask yourself how this bank with minimal high street presence managed to get to the position of being responsible for 1 in 5 of UK mortgages in the first 6 months of 2007 ? Always remembering that it apparently has no exposure to the sub prime market.

The answer is simple, and its the same reason its finding it impossible to raise money on the markets.

Mortgage brokers. Its been common knowledge for at least the last couple of years Northern Rock would accept almost any proposition put to it, providing that the figures worked. You didn't need a credit history and if the broker stated you earned x amount that was good enough. On paper that is not sub prime. Reality of course is different, everyone in the business knows that some of the riskiest lending in British banking history is carried by this bank, and that in the current climate those are likely to be the most overvalued assets around.

I think next week will be interesting.

Edited September 14, 2007 by roamer

[ArranP]

The only thing thats happening is investor centiment is crumbleing, ie. Northen Rock like all the other banks have nobody to sell the mortgages onto, its just that they other banks have more cash deposits than Northen Rock. Just watch there will be more to come.

When investors realise the markets are ok, they will return to buy mortgage backed bonds and the whole finance engine will be started back up again.

Until then the boe covers it and people still take out their mortgages.

Edited September 14, 2007 by ArranP

[chiang mai]

I disapprove of the concept of "get your money out" under these circumstances because it makes no sense. I am also pretty amazed at the way NR's customers are behaving currently by making a run on the bank. The facts are that a) the bank is highly solvent and has assets that exceed its liabilities. the Bank of England has provided lending support to the tune of £4 bill, and c) even on the first day of this so called crisis, two major lenders have offered their services as white nights. Perhaps this is just lemming behaviour on the part of customers and of some posters on TV.

This is a big, big run on this bank/building society. I have personaly witnessed events in my local branch. Ques all day with people closing their accounts - many mature investors withdrawing large amounts from 20 ot 500k. People just dont believe official reassurances. People know that suits (esp politicians) are not to be trusted - read weapons of mass destruction in Iraq.

People might not believe Politicians and right so, but this is different.

I'm not even British myself but I have great confidence in the decisions of the top at the Bank of England. We're talking here about extremely well informed and qualified 'Haute Finance' people who know what they're doing. They're not Santa Claus dropping a bit of money here and there.

It's the 'sensational' news, fed by the press and other media plus the fact that is was a very rare decision by the BoE, (but explainable if one looks at the momentum of the subprime mess) which created panic amongst savers with Northern Rock.

IMHO there's nothing serious going on. IF Northern Rock would have been in really bad shape and on the way to bankruptcy the BoE would NOT have stepped in at this stage.

However I think it is needed that the BoE and/or the Ministry of Finance in the UK gives a clear signal during the weekend in order to prevent further turmoil and withdrawals next Monday.

If these 'withdrawals' would spread to other Banks...yes, than Britain is in deep trouble. Let's hope in won't go that way.

LaoPo

When I started this thread I stated that the mods would no doubt delete it as not Thailand related...though for some reason Countrywide was, it ended here. Maybe when the fallout from this starts to become apparent that will make the news clippings.

Whatever.

Despite claims to the contrary, Northern Rock is a bank, not a building society. It is regulated by the BOE to conduct banking business in the same way as any other bank. Nationwide for example is a building society existing within a different financial regulatory system, more than 70% of its loans are backed by savers deposits, different kettle of fish entirely.

Maybe I belong to the Jeremy Paxman school in that when I listen to a politician speak I think "why is this b**stard lying to me ?" So I don't believe all of this crap that this is a sound institution with temporary liquidity problems or the BOE wouldn't have stepped in. GET REAL. If that were the case then they would have been able to raise money on the markets, albeit at a higher rate, but still lower than the penalty rate from the "lender of last resort"..the BOE.

The Bank stepped in purely to attempt, mark my words, attempt to stop the turmoil in the markets, and it will not work. Savers will continue to draw their money out if for no other reason distrust of politicians here in the UK is higher than almost anywhere else in the developed world.

Lets get away from this. Ask yourself how this bank with minimal high street presence managed to get to the position of being responsible for 1 in 5 of UK mortgages in the first 6 months of 2007 ? Always remembering that it apparently has no exposure to the sub prime market.

The answer is simple, and its the same reason its finding it impossible to raise money on the markets.

Mortgage brokers. Its been common knowledge for at least the last couple of years Northern Rock would accept almost any proposition put to it, providing that the figures worked. You didn't need a credit history and if the broker stated you earned x amount that was good enough. On paper that is not sub prime. Reality of course is different, everyone in the business knows that some of the riskiest lending in British banking history is carried by this bank, and that in the current climate those are likely to be the most overvalued assets around.

I think next week will be interesting.

I agree with much of what you have said Roamer but there are other factors involved here. Northern Rock (NR) grew to its current size via series of mergers and acquisitions involving smaller regional building societies in the North East such as the North of England Building Society in Sunderland (NEBS). These smaller Building Societies had a significant presence in the North of England but were relatively unknown to consumers in the South and it was only after they demutualised in 1997 that they began to spread across the entire UK and reach the size they are today. The component companies that comprise NR are therefore very old and very well established stretching back many many years and NR has a significant high street presence in the North.

I don't know whether NR is the lender that will accept any proposition put to it and whether it has exposure to collateral based mortgage CD's related to sub prime in the US but suspect it may and therein lies the problem. UK banks are awash with cash currently but they are unwilling to lend to each other in the short term because they simply don't know the extent to which the counterparty may or may not have been involved in sub prime lending. In NR's case it is likely that they have yet their balance sheet remains healthy as long as UK real estate values remain as as is. I think the BOE was correct to offer support in the way that it did and its a pretty safe bet since at least two of the UK's larger banks have expressed an interest in buying NR if needed. The problem with all of this is perception and spin. Customers perceptions are that the bank is in trouble so they compound the problem by making a run on the bank. Lending banks perception is that NR may have been involved in sub-prime so they won't lend to NR. Both are in my view wrong and inappropriate. As for the idiots who say, "this is a run on the bank, get your money out", they just compound the problem unnecessarily.

[Journalist]

Sentiment (or 'confidence') is the key driver for a bank. They are imperiled by its absence, whether real or perceived.

1) you are a depositor in NR. Yes you will get your money back via depositor protection schemes. But, depositors are thinking 'what a dashed nuisance that would be - filling in claim forms etc. - Might as well take it out now'

2) you are a shareholder in NR. Marking your shares to market COB friday - You just lost 31%

3) you are a borrower from NR. Your problem is that now cheap depositor funds are being replaced by central bank funding and interbank loans. Interbank funding is priced at LIBOR, which is more expensive than base rate. So you may witness your mortgage rates rising because of that.

This is the most intriguing financial institution story in UK for some years !

Luckily its the weekend. The Bank of England is quite concevably using this time to help NR look for an equity injection from another bank (such as Countrywide received from bank of America last month in USA) .....in any event NR has been a takeover target for the last year, so banks have done their due diligence already. They may see a 30% cheaper price as an incentive.

Edited September 15, 2007 by Journalist

[chiang mai]

Very possibly so and there will be no shortage of potential buyers trying to get a, excuse the pun, rock bottom price. But let's look at the cost of all this for a moment - 6,500 jobs to be cut in the short term even if they are not acquired and certainly a higher number if they are. And the reason for this, larger banks thought that perhaps, just maybe, NR was involved in some way in sub prime lending and/or that their balance sheet represents a a deposit base that is too low for their liking. All of this at a time when the shenanigans of US based lenders is being exposed in a market a couple of thousand miles away. And so the British public hears something or other about a UK bank having difficulties of some kind and presumes it must be the end of the bank. Yee gods, save us from ourselves.

[lannarebirth]

You can still get interest free mortgages in the UK but I've never heard of a 50 year mortgage. The maximum time is usually 25 years.

hi endure,

I think you can find some here:

http://www.google.co.th/search?hl=en&q...Search&meta=

edit: It's funny how news gets broadcast. I was always fearful that the US would get fallout from the property bubble in the UK, but it seems the news agencies like to portray it as the reverse. Whoever coined that term "property ladder" should get the Mobel Prize for marketing.

Edited September 15, 2007 by lannarebirth

[chiang mai]

You can still get interest free mortgages in the UK but I've never heard of a 50 year mortgage. The maximum time is usually 25 years.

hi endure,

I think you can find some here:

http://www.google.co.th/search?hl=en&q...Search&meta=

edit: It's funny how news gets broadcast. I was always fearful that the US would get fallout from the property bubble in the UK, but it seems the news agencies like to portray it as the reverse. Whoever coined that term "property ladder" should get the Mobel Prize for marketing.

I've never heard that angle before, what was the potential process that might have caused fallout in the US resulting from the UK bubble?

[lannarebirth]

You can still get interest free mortgages in the UK but I've never heard of a 50 year mortgage. The maximum time is usually 25 years.

hi endure,

I think you can find some here:

http://www.google.co.th/search?hl=en&q...Search&meta=

edit: It's funny how news gets broadcast. I was always fearful that the US would get fallout from the property bubble in the UK, but it seems the news agencies like to portray it as the reverse. Whoever coined that term "property ladder" should get the Mobel Prize for marketing.

I've never heard that angle before, what was the potential process that might have caused fallout in the US resulting from the UK bubble?

Money is global now. It runs to anywhere on the globe that promises better returns. I've got no problem at all with that, my issue is with leverage.

This "subprime" issue would be nothing more than the excesses you see at the end of every property cycle if not for the underlying instruments being highly leveraged. The market has always been very good at discounting these excesses and shedding the risk. Heretofore, that risk remained in the property sector, where it belonged. Now with money coming from all quarters of the globe, and the underlying security being collatoralized many fold to buy assets in other sectors, one has no ######ing idea what the chain reaction of blowups may be.

[endure]

You can still get interest free mortgages in the UK but I've never heard of a 50 year mortgage. The maximum time is usually 25 years.

What's an interest free mortgage?

Edit: Oh never mind. I guess it means interest only, didn't follow the thread.

Yes, sorry. Should have said interest only, not interest free.

[Journalist]

The lines are back outside Northern Rock today.

Their internet platform yesterday crashing was most unfortunate in maintaining customer confidence.

Whilst depositors won't lose out, Northern Orck's ongoing survival as an independent company looks highly prejudiced.

It is, as people have pointed out, a self-fulfilling prophecy. Who would have thought we'd see an old fashioned bank run in the UK.

Back to Asia. There are places in Asia (not Thailand!) where you can get a 70 year mortgage on a building aged 25 year plus. Your liability will be a legacy for your grandchildren long after the property is demolished. Sounds like lunacy, but borrowers are so fixated on monthly repayments. and if they can afford them, they don't care about the prolonged term.

As you can imagine, the sum paid in aggregate interest is astromically higher than the principal

Edited September 15, 2007 by Journalist

[A_Traveller]

On the Northern Rock point. It became a bank when it ceased to be a mutual society. However, it continued to use the money markets to provide funding for lending, as opposed to the traditional depositors funds basis, in numbers the standard model uses about 7%, the NR model used 43%. This exposed it to additional risks, not systemic, which has led it to the present position, it also endeavoured to grow its business at considerable speed, this means that the chances of NR remaining independent are now slim. Allegedly there was some interest in buying NR, though any deal was undermined by both the shortage of liquidity and growing uncertainty about its value.

Regards

/edit PS If one looks at the share price it is clear that professional investors in the sector were becoming concerned about NR's position, even with share buybacks in operation for sometime now.

PPS Given NR's location, predominantly in the north {viewed as the Labour Party's heartland}, I do see the fingerprints of politicians in this action by the BoE.//

Edited September 15, 2007 by A_Traveller

[LaoPo]

Panic grips Northern Rock customers for second day

LONDON (AFP) - Hundreds of worried customers of embattled British bank Northern Rock began queuing outside their local branches at dawn Saturday as they scrambled to withdraw savings.

Long queues began forming as people gathered outside branches as early as (Saturday) 6:00 am (0500 GMT), according to Sky News television.

Panicking customers of Britain's fifth-biggest mortgage lender had begun to withdraw savings en masse Friday after the Bank of England bailed out the bank, taking out a reported billion pounds (two billion dollars, 1.45 billion euros).

Continues here:

http://uk.biz.yahoo.com/15092007/323/panic...second-day.html

Edit, Related news

EU ministers agree to crisis management blueprint

PORTO, Portugal (Reuters) - European Union finance ministers and central bankers agreed on Saturday to step up cooperation among themselves to improve their handling of cross-border financial crises, an EU diplomat said.

The move -- part of a longstanding review -- comes as the Bank of England stepped in on Friday to rescue Northern Rock, Britain's fifth-biggest mortgage provider, pledging to provide emergency funds after a global credit crunch hit the bank's ability to raise cash in money markets.

Finance ministers and central bank chiefs from the 27-nation bloc were meeting in the northern Portuguese town to discuss, among other topics, how to better work together to maintain financial stability if a cross-border bank went bust.

A senior euro zone source, who asked not to be named, said on Saturday the European Union was not prepared to handle a failure of a pan-European financial institution.

So far, the current turmoil has not sank a cross-border investment firm to trigger thorny issues such as whether taxpayers money should be used in a bail out and if so, which country is should come from.

Ministers agreed to extend a memorandum of understanding they signed in 2005 on cooperating in a cross-border financial market crisis to include common principles for crisis management, a common framework for assessing the fallout from a crisis and practical guidelines on handling a crisis.

Groups of EU states are also encouraged to work together on specific issues.

The pressure on EU states to cooperate better in handling cross-border crises has mounted in recent weeks.

A credit squeeze in global markets that emerged from problems in the U.S. subprime mortgage market has triggered banking casualties in the EU -- SachsenLB and IKB (Xetra: 806330 - news) <IKBG.DE> in Germany.

Saturday's move was based on recommendations made by the Economic and Financial Committee made up of high level finance ministry and central bank officials in the EU.

"The present EU arrangements for financial stability...may not ensure timely, efficient and least-cost solutions in a cross-border context," the EFC said in its recommendations.

"These are weaknesses which must be addressed as a matter of priority," the EFC added.

Financial integration in the EU has made it easier for a crisis in a cross-border bank to spread more quickly. There are now 46 cross-border banking groups in the bloc, 21 of which have significant operations outside their home country, the EFC said.

The new blueprint for handling financial crises will be formally adopted by EU finance ministers in October and implemented over the next two years.

http://uk.biz.yahoo.com/15092007/325/eu-mi...-blueprint.html

More 'Northern Rock' news, here:

http://uk.finance.yahoo.com/q/h?s=nrk.l

LaoPo

Edited September 15, 2007 by LaoPo

[Carmine6]

http://www.telegraph.co.uk/money/main.jhtm...5/cnrock115.xml

This link was posted in the subprime thread. Some interesting information there.

• The bank had £24 billion in deposits at the start of the week
  
• About £1 billion was taken out by depositors on Friday.
  
• The BoE guaranteed up to £31.5 billion in funds.
  
• NR had yet to borrow from the BoE
  

The should have said right from the start that they had not yet borrowed from the BoE. Very definite screw up because the early reports made it sound as if they had already run short of cash and borrowed. The £31.5 billion should have been mentioned early as well since it can cover the entire deposit base.

In a strange way, the money being withdrawn and deposited elsewhere may end up providing some liquidity since other banks will have more cash to lend out short term. The BoE should have just pumped billions direclty into the market like the Eurpoean Central Bank and the US Federal reserve did. Now they're going to end up doing it through lending to NR to cover deposits leaving NR and going to other banks.

A side note. I'd expect that many people will consider buying gold and silver no matter where they bank. How many act on that is up for speculation, but I don't think £1 billion gets moved without some of that ending up in precious metals.

[LaoPo]

http://www.telegraph.co.uk/money/main.jhtm...5/cnrock115.xml

This link was posted in the subprime thread. Some interesting information there.

• The bank had £24 billion in deposits at the start of the week
  
  
• About £1 billion was taken out by depositors on Friday.
  
• The BoE guaranteed up to £31.5 billion in funds.
  
• NR had yet to borrow from the BoE
  

The should have said right from the start that they had not yet borrowed from the BoE. Very definite screw up because the early reports made it sound as if they had already run short of cash and borrowed. The £31.5 billion should have been mentioned early as well since it can cover the entire deposit base.

In a strange way, the money being withdrawn and deposited elsewhere may end up providing some liquidity since other banks will have more cash to lend out short term. The BoE should have just pumped billions direclty into the market like the Eurpoean Central Bank and the US Federal reserve did. Now they're going to end up doing it through lending to NR to cover deposits leaving NR and going to other banks.

A side note. I'd expect that many people will consider buying gold and silver no matter where they bank. How many act on that is up for speculation, but I don't think £1 billion gets moved without some of that ending up in precious metals.

1. withdrawals of 1Billion GBP: it also says that the average was 700 GBP/person. How much people will withdraw today (Saturday!) remains to be seen.

But, with 24 Billion GBP in cash deposits on top of the guanranteed 'up to' 31.5 Billion I don't see huge problems; but of course I don't know all details what's going on. Like everybody else we have to rely on the 'news' presented to us...

2. The BoE guaranteed up to 31.5 Billion GBP and it's kind of logical that this money hasn't been used yet (to the full) by Northern Rock, also due to the time frame.

LaoPo

[LaoPo]

BoE emergency facility for Norther Rock

LONDON, Sept 15 (Reuters) - British mortgage bank Northern Rock said on Saturday it had not drawn down any of the money from the emergency facility it had arranged with the Bank of England so far.

The BoE has offered the funding lifeline to the lender following a credit squeeze. It is the first time the Bank of England has acted as a lender of last resort in this way for at least 30 years.

Interbank lending has fallen sharply over the last month as banks worry about losses on each others' books.

The credit squeeze has its origins in the U.S. subprime mortgage sector, where home loans made to borrowers with poor credit histories were repackaged and sold on as asset backed securities to institutional investors around the world.

Following are some key facts on the Bank of England's emergency lending facilities.

- The Lender of Last Resort facility is a tailor-made rescue package that must be agreed by the Bank of England in conjunction with the Treasury and the Financial Services Authority.

- It is not to be confused with the BoE's Standing Lending Facility which allows all participating banks to borrow overnight at a penalty rate of one percentage point above the Bank rate.

- In its Lender of Last Resort role, the Bank of England can offer emergency credit for a longer period of time.

- The financial institution seeking an emergency loan must offer high-quality collateral against it and pay a penalty interest rate to the central bank. Such a loan is generally only offered on a temporary basis to an institution that is otherwise regarded as solvent. The BoE may ask for more collateral of a hight value than the loan.

- It is offered only in exceptional circumstances and to prevent a bank failure having a serious impact on the broader financial system and economy.

http://investing.reuters.co.uk/news/articl...C1-ArticlePage2

LaoPo

[Journalist]

/edit PS If one looks at the share price it is clear that professional investors in the sector were becoming concerned about NR's position, even with share buybacks in operation for sometime now.

Hedge funds will have been shorting this stock aggressively. With a lower deposit base, the firm is worth commensurately less as an M&A target.

Media are fanning the flames perfectly, and this is to all intents and purposes now a dead bank. I'm not being a chicken likken, this is a fascinating spectacle. Depositor hysteria In the UK of all places, amazing.

[lannarebirth]

http://www.telegraph.co.uk/money/main.jhtm...5/cnrock115.xml

This link was posted in the subprime thread. Some interesting information there.

• The bank had £24 billion in deposits at the start of the week
  
  
• About £1 billion was taken out by depositors on Friday.
  
• The BoE guaranteed up to £31.5 billion in funds.
  
• NR had yet to borrow from the BoE
  

The should have said right from the start that they had not yet borrowed from the BoE. Very definite screw up because the early reports made it sound as if they had already run short of cash and borrowed. The £31.5 billion should have been mentioned early as well since it can cover the entire deposit base.

In a strange way, the money being withdrawn and deposited elsewhere may end up providing some liquidity since other banks will have more cash to lend out short term. The BoE should have just pumped billions direclty into the market like the Eurpoean Central Bank and the US Federal reserve did. Now they're going to end up doing it through lending to NR to cover deposits leaving NR and going to other banks.

A side note. I'd expect that many people will consider buying gold and silver no matter where they bank. How many act on that is up for speculation, but I don't think £1 billion gets moved without some of that ending up in precious metals.

1. withdrawals of 1Billion GBP: it also says that the average was 700 GBP/person. How much people will withdraw today (Saturday!) remains to be seen.

But, with 24 Billion GBP in cash deposits on top of the guanranteed 'up to' 31.5 Billion I don't see huge problems; but of course I don't know all details what's going on. Like everybody else we have to rely on the 'news' presented to us...

2. The BoE guaranteed up to 31.5 Billion GBP and it's kind of logical that this money hasn't been used yet (to the full) by Northern Rock, also due to the time frame.

LaoPo

When you say 24 Billion in cash deposits, is that the line item for deposits, or the actual cash on hand? I don't know about the UK, but in the US the marginal reserve requirements is, I think, 10%. Anyhow, it looks as though there are plenty of banks or agencies willing to provide liquidity, if needed.

[lannarebirth]

The credit squeeze has its origins in the U.S. subprime mortgage sector, where home loans made to borrowers with poor credit histories were repackaged and sold on as asset backed securities to institutional investors around the world.

These financial journalists always make me laugh. Two days ago they were unaware there was a problem. Today they can tell you with specificity just why there is a problem. Just from what I've read on this thread (and that's all I know of it), it seems clear to me this bank has mismanaged it's business.

[Journalist]

^Its been reported for some time that last week was the start of the refinancing period.

I.e rollovers of commercial paper that was maturing. No surprise there was going to be fireworks, but few were expecting such an exciting outcome. Everyone assumed they'd muddle through. Never overestimate the Great Britsh public. Hoorah !

...besides,. you're being a wee bit unfair! Financial journalists are not pundits or Phd forecasters, just reporters of whats happening. If i'd known Northern Rock was going tits up, i'd be running a hedge fund and shorting its stock up the wazoo. As would all of us.

Edited September 15, 2007 by Journalist

[AlexLah]

A picture of a cue outside the bank in question....

[LaoPo]

Q&A: Northern Rock crisis

The Bank of England has given emergency financial support to the UK's fifth-largest mortgage lender, the Northern Rock.

This has made the Newcastle-based firm the highest-profile UK victim of the global credit crunch, triggered by the sub-prime mortgage crisis in the US.

*******************************************************

Why does the Northern Rock need to be bailed out?

Essentially, the firm needs to secure access to a greater flow of cash so that it can continue its business.

Unlike most banks, which get their money from customers making deposits into savings accounts, Northern Rock is built around its mortgage business.

It raises most of the money which it provides for mortgages via the wholesale credit market - primarily by selling the debt on in the form of bonds.

Following the widespread losses made by investors in loans to US homebuyers with poor credit history, the so-called sub-prime loans, banks and investors who have had their fingers burned have become wary of buying any mortgage debt, including Northern Rock's.

Therefore, it is not seeing the flow of money that it would normally enjoy - and needs to keep its business going.

Should Northern Rock customers panic?

Experts say that Northern Rock is still a profitable and viable business and that there is little prospect of it going bust.

People who have saving accounts with Northern Rock probably don't need to panic, said Angela Knight of the British Bankers' Association.

The message from the government and others is that the very fact that the Bank of England has agreed to provide emergency funding was an indication that it believed the problems at the Northern Rock were temporary.

Is Northern Rock more susceptible to problems than others?

Given the lack of credit available on world money markets, all banks are having greater than normal difficulties in getting funding.

However, as a specialist mortgage lender, Northern Rock has struggled more than most.

"It is much more exposed than its rivals to this distaste for mortgage debt, because its business is overwhelmingly focused on providing mortgages, rather than other kinds of banking business," said BBC business editor Robert Peston.

What does it mean for Northern Rock as a business?

In the short term, it means it is borrowing money at a rate well above the market rate - essentially a financial penalty for getting itself into this position.

The bank will also be lending much less to new home buyers in the coming months, as it restricts fresh mortgage offers to its customers.

"We have taken prudent action to rein back our lending until markets normalise," said its chief executive Adam Applegarth.

In the longer term, some are predicting that Northern Rock may look to be bought by a larger company.

"I'm not sure it will be the end of Northern Rock," said Howard Wheeldon of BGC Partners. "But it may be the end of it as we know it."

And what about the customers of other banks?

People with poor credit history will find it increasingly difficult to get a loan or mortgage - or may have to pay more for it.

And some banks may have a bumpy ride themselves, although the Treasury and the Bank of England have promised to help every bank hit by the credit crunch - as long as the underlying business is safe and sound.

Is it common for a firm to have to turn to the Bank of England in this way?

No. This move is extremely rare, which is what makes it such massive news.

It is thought that the Bank of England last acted as a "lender of last resort" to a bank in the 1970s, and the decision has been made after consultation with the Treasury and the City watchdog, the Financial Services Authority.

On its website, the Bank of England says that it would expect to take such a step "very rarely" and it "would normally only be undertaken in the case of a genuine threat to the stability of the financial system to avoid a serious disturbance in the UK economy".

So it's not common. But was it expected?

There has been concern for some weeks in financial circles about Northern Rock's position and problems it may face.

However, most agree that for things to have become this bad is still a big surprise.

Earlier this week, the Governor of the Bank of England, Mervyn King, told the Treasury Select Committee that the Bank would be prepared to provide emergency loans to a bank that ran into difficulties, so long as those difficulties were the result of temporary market conditions.

What is happening to Northern Rock's shares?

The firm's shares have already fallen in value by about 50% this year, including losing about 5% on Thursday.

On Friday, its shares plunged another 32%.

Shares in other lenders could also be in for a "hammering", said Mr Wheeldon.

What's happening at Northern Rock:

http://news.bbc.co.uk/2/hi/business/6994160.stm#back

LaoPo

[A_Traveller]

Just add the point that right now given the assurances being issued, by both BoE and the Chancellor, the safest bank in the world right now is NR. The moral pressure to pay out to depositors 100% of their losses would be considerable. For what it's worth, this institution's business plan, which as I've noted above is substantially different form the other major banks, made it a high risk target when the credit crunch occurred.

Unfortunately the statements of the BoE contributed to the febrile atmosphere, by making individuals very concerned about this 'bailout' being the 'first in 30 years'. The Fed's approach was to force a number of institutions to come to the discount window, thereby ensuring any subsequent tranche would be less 'news worthy', a ploy which has succeeded, after all at this time NR has not touched the money available to it and yet is being hammered.

Regards

Edited September 15, 2007 by A_Traveller