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Monday, September 17, 2007


bank run kills northern rock

just two days after issuing a very tough policy statement, the bank of england cowed to the possible collapse of uk bank northern rock by offering a bailout through the equivalent of the discount window.

but that did not stop depositors friday from killing the bank in a massive run (photos via calculated risk).

The run on the bank continued yesterday as police were called in to keep the peace when angry and desperate customers besieged branches across the country despite assurances from the Treasury and Bank of England that their savings were secure.

Branches due to close at midday opened until 2pm, but many hundreds of people were still trying to get their money when the branches closed and minor scuffles and arguments broke out.

The bank, which saw £1 billion taken out by worried savers on Friday and at least £500m removed yesterday, is prepared for a further flood of withdrawals when branches open tomorrow. Many will be by customers with nearly £10 billion in postal accounts, who can only make withdrawals by writing to the bank.

“The question is why wouldn’t you take your money out and put it somewhere else,” said one senior banker, who predicted £12 billion worth of withdrawals from the bank, which has £24 billion in deposits from savers. “Though Northern Rock is solvent, a lot of people have been gripped by the fear that they might lose some of their savings. It is a huge problem.”

One banking analyst warned: “It is not beyond the realms of possibility that they could lose half of their deposit base, if not more.”

“We have not had a decent run on a bank for many, many years. The difference now is the internet and that means you can get your money out very quickly. Banking is about confidence and that has gone from Northern Rock in a spectacular way.”

Michael Fallon, a Tory member of the committee, said: “It seems very odd that Mervyn King was saying there would be no bail-out, then he sets out how to do a bail-out and then he does the bail-out. We need to understand much more clearly how the decision was taken."

the run is devastating northern rock's overlevered balance sheet, and if it survives at all it will be as in pieces.

THIS is why most banks in trouble will not tap the discount window except in the most dire circumstance, regardless of how bernanke's fed tries to make policy with it -- particularly now with northern rock as precedent. once it becomes clear that a bank is in trouble, little can save it. to the extent that the window can be used, it will have to be through "too-big-to-fail" intermediaries -- and i suspect that's exactly what's been happening.

as mish says, expect more of this kind of thing here and there. this is already the second bank run of this affair, the first being countrywide. now alliance & leicester, the uk's seventh-largest bank, is being implicated by the market.

Bradford & Bingley, which makes one in five loans to U.K. landlords, and Alliance & Leicester, another U.K. commercial and consumer bank, were among banks that were downgraded to ``sell'' from ``hold'' at Citigroup.

Citigroup lowered its recommendation on shares of nine European banks and cut earnings forecasts for the industry, citing a drop in credit-market revenue that will bring about ``wide-scale changes.''

Bradford & Bingley sank 15 percent to 279 pence and Alliance & Leicester fell 31 percent to 600.

``The negative macro picture is likely to play out to the detriment of Alliance & Leicester,'' Merrill Lynch analysts Manus Costello and John-Paul Crutchley wrote in a report today.

``We think a takeout is unlikely in the current environment, especially when there is no shortage of cheaper U.K. assets for an interested buyer.'' They cut the recommendation on Alliance & Leicester to ``sell'' from ``neutral.''

the bank of england late today guaranteed all northern rock deposits. we'll have to see if that quells the run.

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