A severe case of the runs
September 17, 2007 12:21 PM   Subscribe

A run on the bank: Ever since the Bank of England announced that they were offering Northern Rock an emergency line of credit, people have been queueing to withdraw to withdraw their money in the first bank run in the UK for decades.

The government has been forced to announce that it will guarantee the deposits of Northern Rock customers, in the hope that this will stem the crisis. Unfortunately, rumours about other UK banks being in similar difficulties are already causing their share prices to fall precipitously. Given that this is only day one of Crunch week, things could get even worse!
posted by pharm (44 comments total)
Is this something I would have to have seen Mary Poppins to understand?
posted by The World Famous at 12:33 PM on September 17, 2007 [2 favorites]

I'd read this commentary in the FT that seems to be saying that the Northern Rock crisis isn't particularly serious and that the mechanisms to handle it were in place without any need for the BOE to step in. I'm a complete ignoramus so far as money is concerned, so I wasn't sure if the author's point is that it is no threat to the financial system and he just doesn't care about homeowners and depositors, or if they too would be OK if they could just hang on.
He seems to think the main motivation behind the intervention is Brown not wanting a run on the bank during his premiership, but is this move also protecting families from foreclosure?
posted by Abiezer at 12:33 PM on September 17, 2007

Least it has (just about) taken Maddie off the news... and gives another reason to moan about Bush/America. Yes, it's all your fault.
posted by fearfulsymmetry at 12:36 PM on September 17, 2007

The only protection from foreclosure involved is that the government hopes to stave off a wider collapse in the economy by bailing out Northern Rock.

Whether or not NR survives will make no (or very little) difference to whether people who are behind on their mortgage payments to NR get foreclosed on or not; if NR collapsed then those mortgages would be sold as part of the assets of the company.

At least that's my understanding of the situation.
posted by pharm at 12:38 PM on September 17, 2007

Is this something I would have to have seen Mary Poppins to understand?

I think It's a Wonderful Life also offered a penetrating analysis of the same situation.
posted by jokeefe at 12:50 PM on September 17, 2007

I walked past a huge queue of people waiting to withdraw their savings from a Glasgow branch of Northern Rock today. Not one of them appeared to be a day under 60 years of age.

Once again the unthinking masses of the UK go do-lally over whatever the BBC is making a big deal of at the moment (see eggs, fuel 'shortages', the death of Diana, bird flu etc).

posted by brautigan at 12:56 PM on September 17, 2007

The run on the bank is idiotic and will mean that some bank gets to buy a quality loan book (Northern Rock has zero sub-prime loans) at a rock-bottom price. Recent analyst estimates said that the loan book, even in run-off (i.e. even if NR didn't offer another mortgage again), would justify a share far higher than it closed today.

The FSA judges that Northern Rock is solvent, exceeds its regulatory capital requirement and has a good quality loan book. The decision to provide a liquidity support facility to Northern Rock reflects the difficulties that it has had in accessing longer term funding and the mortgage securitisation market, on which Northern Rock is particularly reliant.

The BoE credit line (which hasn't been drawn yet) is only available to solvent banks, requires collateral and attracts a premium rate of interest so it's not quite a "bail-out".

The government's guarantee is essentially only there to prevent a short-term liquidity crisis plus a rabid press who willfully misreport the situation to generate "crisis!" headlines meaning that a perfectly good institution gets rolled over.

Martin Lewis has a good description and consumer guide.
posted by patricio at 12:59 PM on September 17, 2007

Does this mean that using the Bank of England as lender of last resort is going to be commercial suicide from now on?

God those people are morons. There was a woman on the TV today banging on about how she couldn't understand how such a thing (asking the BoE for a credit line) could possibly happen to a bank, and she'd never trust any bank ever again.

Panic-buying petrol has nothing on this.
posted by bonaldi at 1:04 PM on September 17, 2007

Martin Lewis comes up with some sense.

Silly Season + Media Driven Panic = People Wasting Time in a Queue *yawn*
posted by i_cola at 1:05 PM on September 17, 2007

How can I profit off the panicked masses is what really needs to be answered.
posted by anthill at 1:05 PM on September 17, 2007 [3 favorites]

Still, gotta love that our bank runs involve very long, very polite queues, and people resignedly trotting off home at close of business, only to return with a flask of tea and folding chair the next morning. Whatever happened to cramming in the doors demanding "MY MONEY!!!1"?
posted by bonaldi at 1:06 PM on September 17, 2007

I wouldn't be quite so sure of the quality of the NR loan book. They have a very low default rate which is a definite plus, but on the other hand they've been a prime mover in the UK's shift to mortgage types which would I believe would be regarded as sub-prime in the US: high loan-to-income ratios, high loan to value ratios (their 'Together' mortage consisting of a 95% mortagage plus a 30% personal loan was very popular), stated income loans etc etc.

Northern Rock was also involved in selling 'official' sub-prime mortgages, but these were all done purely on an intermediary basis on behalf of other banks (Lehman Brothers especially IIRC), and that lending stopped dead in August.

Many people (myself included) think that in the event of a housing market downturn, the NR default rate may go much higher, in a similar fashion to the US subprime fiasco.
posted by pharm at 1:09 PM on September 17, 2007 [2 favorites]

"I walked past a huge queue of people waiting to withdraw their savings from a Glasgow branch of Northern Rock today. Not one of them appeared to be a day under 60 years of age."

I agree, a line of people making a bank run in this day and age appears crazy at first glance.

But then again, considering the UK form of depository insurance only covers £31, 700 per customer per bank, their actions might just be rational. Especially so if we're talking life savings for those over 60's who more than likely have sums greater than the maximum deposited.

On the other hand, the share price has taken an total beating the past few days. Hardly rational behaviour on the part of the sellers.
posted by Mutant at 1:11 PM on September 17, 2007

Next story: A junkie steals a bundle from a pensioner he's trailed from Northern Rock.
posted by i_cola at 1:11 PM on September 17, 2007 [2 favorites]

Is there any equivalent to FDIC insurance in the UK? Here in 'murica, traditional savings accounts are backed by the gubmint up to $100,000. So your average Joe Sixpack's deposits are safe even if the First National Bank of Defaultonville goes belly up.
posted by Joe Invisible at 1:31 PM on September 17, 2007

I shall not post without first reading the thread. I shall not post...
posted by Joe Invisible at 1:36 PM on September 17, 2007

"...traditional savings accounts are backed by the gubmint up to $100,000"

A lot of the news coverage as well as anecdotal evidence (upthread) has agreed many of those in line are older. Seems there are two factors at work here:

Older folks are more likely to (perhaps personally) remember how devastating previous bank runs were, and equally less likely to be informed about steps the G13 in general and the UK specifically have taken to insure stability of the financial system.

They also are far more likely to have in excess of £31,700 on deposit. In the UK folks are already angry about what many perceive to be excessive bank fees while these institutions makes rapacious profits; a bank failure, perhaps taking a proportion of life savings with it, would simply add injury to insult.
posted by Mutant at 1:55 PM on September 17, 2007

Next story: A junkie steals a bundle from a pensioner he's trailed from Northern Rock.

Well, what with that "skunk" you have other there that's ZOMG 1000X MORE POTENT what do you expect?
posted by TheOnlyCoolTim at 2:03 PM on September 17, 2007

Silly bank. Everyone knows the North is known for Northern Soul, not Northern Rock.
posted by kcds at 2:09 PM on September 17, 2007

I have a couple of mates that work in the City, one at a major, the other at a boutique investment house, and both said that many senior analysts were shitting their pants about the volatility of the markets and looked as if they hadn't slept all weekend.

These people pride themselves on their clever dick understanding of the intricacies of markets but they still don't know who is sitting with the shit sub-prime debt and they know that the liquidity isn't going to come back any time soon.

The NR fiasco may be the first big casualty in the UK of the credit crunch but it certainly doesn't mean that they will be the last to suffer. I expect that until we start seeing write-offs and/or big provisions in the accounts of some of the major banks (and even then how do they quantify that, given that no one knows where the bad debt is?) then there will not be much money moving anywhere and much greater volatility. When money isn't moving then any business that operates on a highly geared basis will find it harder to borrow (not just banks) and costs and inflation will rise. As these are passed onto the consumer it is inevitable that inflation and all the problems that entails will come along.

It's just the start of it.

although admittedly it doesn't explain people being prepared to incur penalties just to stuff their cash under the mattress.
posted by ClanvidHorse at 2:11 PM on September 17, 2007 [2 favorites]

Do you think the name has anything to do with it - it sounds like a small town operation without £12bn to its name.
posted by A189Nut at 2:25 PM on September 17, 2007

pharm has it right. And when sub-prime happens in the UK, it won't be called sub-prime - it'll be called the self-certifying scandal, or the buy-to-let bubble. But it'll happen. Commentators are already talking about near-zero house price appreciation in 2008, which in itself could easily tip the market into decline - as a surprising proportion of current buyers (buy-to-letters in student towns; non-doms in London) are only in it for the equity uplift. If you haven't already, sell your Bradford & Bingley shares.
posted by runkelfinker at 2:28 PM on September 17, 2007

Although, to be fair to the flock of daily-mail-reading greybeards who make up the queue, a lot of them grew up in flakier financial times, when the UK flirted with economic disaster, banks were flimsier, and parents often remembered the depression. It's a similar cautious school of thought that keeps the beans stocked up in the bomb shelter - something I suspect a few mefi members might be guilty of...
posted by Luddite at 2:29 PM on September 17, 2007

Bank runs are fascinating things. Once they get going, they are seemingly impossible to stop. Bill Gates could show up and deposit $100K in cash and people would still be withdrawing money.

OTOH, FDIC and other government bank insurance systems don't exactly pay overnight; it can take six months before depositors get a check from the feds. So, if you're a pensioner or someone living on savings, it's perfectly rational to pull money out as a hedge against waiting out the payoff.
posted by dw at 2:31 PM on September 17, 2007

Do you think the name has anything to do with it - it sounds like a small town operation without £12bn to its name.

I'd never heard of them until they put their name on the front of Newcastle's kit.
posted by dw at 2:33 PM on September 17, 2007

I have long wondered how the quick-as-lightning rumour-spreading capabilities of the internet/email would affect the next great bank runs. The stock market has special "trips" in the software to keep things from cascading too quickly, but there are no such "safeguards" on widespread human panic.
posted by spock at 2:49 PM on September 17, 2007

BCCI bank collapse in the 90s, anyone remember that? The people withdrawing their money certainly do. And if you think that doesn't count as it wasn't a uk bank, NR customers would not get it all back under current FSA rules (anything over £10k would not have been guaranteed) if they go under. Gordie Brown has stepped in now I believe, but really, why the hell would you leave your money in a bank that handed out 125% mortgages like sweets?
posted by somethingiswrong at 2:58 PM on September 17, 2007

> These people pride themselves on their clever dick understanding of the intricacies of markets but
> they still don't know who is sitting with the shit sub-prime debt

Warren Buffet, with all his experience reading company balance sheets and digging the truth out of financial reports (and with his Mr.-Investor-of-the-last-100-years record of success doing this) said several years ago that in many cases he was no longer able to figure out how much true debt a company was carrying and hence could no longer tell how risky investing in that company would be. One of the things that makes him Warren Buffett is that he noticed this several years back while the rest of the smart guys are just now tumbling to the notion.
posted by jfuller at 3:05 PM on September 17, 2007 [2 favorites]

How can I profit off the panicked masses is what really needs to be answered.

Well, with shares prices dropping 35-40%, maybe this is a good opportunity to buy stock in Northern Rock....uh, assuming things are going to pick up again.

E.g: I still kick myself for not buying airline stock post 9/11, when it all took a nosedive. We all knew things were going to get back to normal. I mean, that two hundred bucks I could have spared to invest in Air Canada back then, when it's share price bottomed out at like 90 cents, today would be worth something on the order of eight or nine hundred dollars.
posted by Flashman at 3:18 PM on September 17, 2007

its... duh
posted by Flashman at 3:19 PM on September 17, 2007

The collapse in their share price is NOT a function of the quality of the loans that they have made and is not because they have made investments in other bank's murky sub-prime loans. Instead it's a bit more accurate to say that they're an indirect victim of the fallout from subprime and the ensuing credit crunch because of how they finance their lending obligations, which relies to a greater extent on short-term borrowing in the commercial paper market (which has effectively closed down) rather than through customer deposits. They are still solvent and hold well more than the required regulatory capital.

More to the point is that the media were unable or unwilling to explain the story in a non-panic inducing fashion.

Runkelfinker - I'll take your B&B shares off you at a fair price...
posted by patricio at 3:35 PM on September 17, 2007

flashman - the link to the FT in my earlier post quote IB analysts who reckon on a fair value near 400p per share even if the loan book is closed to new business. I reckon it won't get that high because banks are waiting to see (a) the damage to the goodwill (i.e. the Northern Rock name will probably be irreparably damaged) and (b) if they can get the assets even cheaper.
posted by patricio at 3:38 PM on September 17, 2007

It's from spending all that cash on Alan Shearer, Obafemi Martins and Michael Owen.
posted by wfc123 at 3:43 PM on September 17, 2007

About the share price - speaking as a lifelong student of the markets, we always see the same drivers in any crisis, albeit to greater or lesser extents.

Greed and excitement later turn to revulsion and fear.

What shares folks previously were all excited about and willing to purchase at totally outrageous prices are later shunned, as people become fearful about getting their original capital back, and are willing to realise losses, no matter how large.

I don't invest in the UK equity markets - the US alone is more than enough for me thank you very much - but if I did I'd probably be moving some cash into Northern Rock.

The emotionally driven selling we've seen the past few trading days is a classic buying opportunity. Not sure if this is a long term hold, I'd have to study the sector in general and this firm specifically before committing capital, but these things almost always snap back at some point, even for what may turn out to be a short time.
posted by Mutant at 3:44 PM on September 17, 2007

posted by MetaMonkey at 4:48 PM on September 17, 2007

I love how a full quarter of those interviewed (two of the eight) recognize that they're part of a frightened crowd irrationally perpetuating a downward spiral --

“It’s pointless panicking; it’s like somebody shouting 'fire' in the cinema and everybody runs - it’s a self-fulfilling prophecy. I’m withdrawing just to be on the safe side.”
This couple said they feared for Northern Rock’s future. “If lots of people take their money out then they’ll have to fold, that’s how I see it. I’m worried."

posted by salvia at 5:07 PM on September 17, 2007

salvia: It's just like selling shares, you know that the market is full of barely-rational cocaine-fueled traders, so if you know they're going to do something, you have to do it first, if it'll affect you. Hence, mobs and insanity, even when you're fully aware of how stupid it is. Markets make us all move in one giant, tremendously retarded pile.
posted by blacklite at 5:36 PM on September 17, 2007 [3 favorites]


That's a better explanation of the war on drugs than most I've heard.
posted by effugas at 9:06 PM on September 17, 2007

Is this something I would have to have seen Mary Poppins to understand?

yes - do you know the part where they sing "feed the birds, tuppence a bag"?

now think of yourself as the bird and no one having tuppence to piss away on you and you have it
posted by pyramid termite at 9:30 PM on September 17, 2007

I'm amazed by the disdain for the people in the queues, both in this thread and from economists in the media. It is perfectly rational to spend a day switching your savings bank, especially if you're retired and you've got the day free, if there's even the tiniest, most minuscule chance that your savings aren't safe - and given recent pensions and mortgage scandals there is no rational reason to assume that a government promise is 100% watertight. The problem is with the economists' concept of rationality, not with the brains of the queueing people.

It's particularly ironic to see people being criticized for taking part in a crowd panic even though they are aware that that's what they're doing. This is pretty much the definition of a stock market.
posted by game warden to the events rhino at 1:52 AM on September 18, 2007

Bank shares rebound
I guess Mutant triggered a rally.
posted by Flashman at 2:57 AM on September 18, 2007

game warden - it depends on the size of your savings and exactly how miniscule the chance is. The time the cash stays under your mattress is not costless to you. As you say though, if you're retired and have nothing better to do...
posted by patricio at 3:51 AM on September 18, 2007


Look at it this way: Of the last n times the press has made a big deal about a bank that might collapse, a collapse has actually occurred m times. m over n is, at absolute best, 1/10. The press is ridiculous, but not that ridiculous.

Suppose you have 10K pounds in the bank. 1/10th of 10K pounds is 1K pounds. That's the risk adjusted cost of leaving your money in the bank.

Saving a thousand pounds in risk adjusted dollars is a pretty rational thing to do.
posted by effugas at 5:35 AM on September 18, 2007

blacklite, thanks, I like your market-as-mosh-pit image. :)

game warden, I'm not positive it is the definition of the stock market, or at least not the only option -- two of my brothers (both research analysts at some brokerage) fawn over Warren Buffett, who I guess focuses on fundamentals, invests for life, and recommends people "be greedy when others are fearful" (best rejoinder, the third comment down). Still, I didn't mean to disdain anyone, I just think it's kinda funny and ironic, "we're all acting crazy, and people acting crazy is what's going to cause this place to go under, but, I gotta do it before others do." It's some prisoner's dilemna, it's hard to trust the rest of the mob.
posted by salvia at 10:50 AM on September 20, 2007

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