The Government last night took the unprecedented step of issuing an explicit
guarantee to all Northern Rock savers amid fears that public panic could
spread to other financial institutions.
The move, which leaves taxpayers underwriting about £28 billion of deposits –
or the equivalent of about three-quarters of Britain’s defence budget – came
as rumours of problems at other banks flew around financial markets.
Shares in Alliance & Leicester collapsed by 31 per cent, wiping £1.2
billion from its market value, on a false rumour that it had applied to the
Bank of England for emergency finance. Bradford & Bingley shares fell by
15 per cent.
Treasury officials made plain that, if other lending institutions hit problems
and approached the Bank of England, then they, too, would be eligible for
similar treatment, including the deposits guarantee if they were considered
solvent. By giving a cast-iron guarantee to Northern Rock’s savers, the
Government departed from the decades-long tradition of leaving some
ambiguity in order to encourage banks to behave responsibly.
After another day during which calming words from ministers and regulators
failed to shorten the queues at Northern Rock branches, Alistair Darling,
the Chancellor, said that he wanted “to put the matter beyond doubt”.
He added: “I can announce today that following discussions with the Governor
[of the Bank of England] and the chairman of the Financial Services
Authority, should it be necessary, we, with the Bank of England, would put
in place arrangements that would guarantee all the existing deposits in
Northern Rock during the current instability in the financial markets.
“This means that people can continue to take their money out of Northern Rock.
But, if they choose to leave their money in Northern Rock, it will be
guaranteed safe and secure.”
Although technical details still need to be worked on, Mr Darling said that
the guarantee would be binding. It will apply not only to the estimated £22
billion of retail deposits but also to around £6 billion of wholesale
deposits, so that businesses as well as individuals will be protected. More
than £2 billion has already been withdrawn from Northern Rock.
The Treasury was unable to say last night whether depositors’ interest was
also guaranteed.
The guarantee has been offered without an attempt to put a Treasury nominee on
to the Northern Rock board. “At the moment the company is solvent and
Northern Rock is running its own company,” a Treasury spokesman said.
Justin Urquhart Stewart, of the City firm Seven Investment Management, said:
“This is extraordinary. I’ve never seen anything like this. When did you
last see a private company guaranteed by the Government? Are they now
underwriting the entire British banking system?”
The policy shift came after hopes receded of a private-sector rescue of the
Newcastle-based bank. Northern Rock said that it was not now in discussions
with any other party. Until last week Lloyds TSB was in serious talks about
a rescue takeover.
The beleaguered lender said that the statement “makes it clear beyond doubt
that all savings in Northern Rock are safe and secure”. It also moved to
encourage deserting depositors to return by offering to refund exit
penalties to those who put their money back in the bank.
Although the Chancellor, the Bank and the FSA have made reassuring comments
about the security of deposits at Northern Rock, last night’s statement was
designed to remove any remaining doubt. The normal deposit protection system
run by the Financial Services Compensation Scheme only fully protects the
first £2,000 of a bank or building society deposit and then 90 per cent of
the next £33,000. For larger deposits there is no legal protection. So
existing Northern Rock deposits are now safer than any other bank.
Northern Rock savers in Kingston-upon-Thames were yesterday dismayed when a
photocopied memo from chief executive Adam Applegarth was pushed out through
the letterbox addressed to “All staff”. It advised staff to reassure savers
the government had guaranteed all deposits and signed off, “Bloody hurrah!”
"The Chancellor’s statement makes it clear beyond any doubt that all
savings in Northern Rock are safe and secure. Consequently anybody who is in
a queue outside a branch, or who is trying to access an online account can
be fully reassured that there is no cause for concern whatsoever. Bloody
Hurrah!,” Mr Applegarth wrote.
Before the intervention, Northern Rock shares slumped by another 35 per cent
and now stand at 282.75p.
Mr Darling said that Britain was well placed to handle the lending crunch that
arose from a collapse in the US sub-prime mortgage market.
But David Cameron, the Conservative leader, said: “Under Labour our economic
growth has been built on a mountain of debt and, as any family with debts
knows, higher debt makes us more vulnerable to the unexpected.”
Alan, warks, uk -
Yes, we do need government to take a long-term strategic view. However, this is hard in a democracy.
Governments can lose elections. Even when they survive for several terms, they do so by adjusting policies to keep public support. Either way, policy and implementation are inevitably unstable - as in the NHS, for example.
The alternatives (oligarchies or dictatorships) have other even worse disadvantages - look at France or Russia. Not only are the conditions of life oppressive, but too frequently such countries do not even get the benefits of consistency and long-termism you might expect. Small groups and single leaders also panic in the face of events.
I'm afraid we have to accept that we live in a short-term, often irrational world. That's life. But cheer up: life is no way permanent. In 100 years, it won't be our worry.
Michael Bruce, Selby, Yorkshire
Regardless of the government guarantee I intend to withdraw my money however small it may be. The fact is NR have been lending recklessly and one day their arrears and repossessions will increase. Trouble is as an average investor haw do I check any banks "real" financial position.
BrianG, Gloucester,
When a company recklessly overtrades and gets into a hole, compromising the finances of thousands of savers, should the government bale it out?
Gordon's answer is, yes if it's Northern Rock, no if it's Equitable Life. What is the difference?
Since his policies as Chancellor are in part responsible for both problems, as well as for the rest of the boom/bust situation we find ourselves in, will he please explain himself?
He has a lot of explaining to do.
Michael Bruce, Selby, Yorkshire
Re tinsing's comments, surely the consequences for the Board of Northern Rock will be that they no longer have jobs after the current debacle is settled and the bank is taken over. They have not broken any laws so they are not criminally accountable for what has happened which is entirely the making of the media in frightening people. It reminds me of the panics about toilet paper and sugar in the 1970's which were self-fulfilling. The same thing happens from time to time with many commodities and is entirely about the mentality of the herd. At least the government has accepted responsibility for individual savings accounts - to have done otherwise would have resulted in runs on other banks regardless of their level of securitisation. The real problem is that all mortgage banks and building societies borrow over the short term and lend over the long term and are all vulnerable to market confidence (or lack of).
Peter, Shrewsbury, UK
Brilliant, a blank cheque, with our money, to bail out this, and pobably any other bank in the future. These banks are paying the price for years of mis-management, greed and dubious lending practices. No real surprise that a government with an equally inept background decides to guarantee any shortfalls with money that should be spent on the country, not private business.
I think the Royal Bank of the Mattress is about to make a comeback.
Incidently, I understand that The Rock are paying out customers with cheques, how daft ae these people? they don't trust the bank, so how come they think the cheques will be honoured?
Steve Plows, Peterhead, Scotland
Why is the government using public money to rescue Northern Rock. What are they going to do when the next one gets into trouble? Let them sink or swim on their own!
SwordofAlbion, london,
This is unprecedented and dangerous: as yet we don't even know what kind of liabilities Northern Rock has and what level of subprime borrowing it has on its books. If the assets backing its loans (i.e. house prices) drop or if their loan book is not as healthy as it appears then the UK taxpayer has just been asked to underwrite the losses of a failing company that has pursued a high-risk, heavily-leveraged business model.
How much further is Labour willing to go to bankrupt the UK and foster moral hazard and hyperinfation? All in the name of rescuing a destabilising housing boom and a corrupt financial services industry. So banking is now underwritten by the government - but all other private sector businesses must continue to operate in the free market: it's economic insanity.
MB, Edinburgh,
James,
That's a very interesting point because if one recalls, that was the reason that they (BOE) would not step in over Barings....
On the other hand the 'guarantee' is very tenuous - to use reasonable or best endeavours... that sort of thing.
I would like to see most average punters fighting HM Govt. in the Courts to obtain the compensation for their deposits(without Legal Aid of course).
I am suspicious that it is unenforceable.
Pete Balchin, Solicitor , Bristol, UK
I do hope that this will not effectthe boards bonuses and perks ??
Chris Holland, Norwich, Norfolk U.K
Although this may stop the panic I have to wonder at what cost ? The government now seem to be saying implicitly that they are offering a guarantee for every deposit in every bank in the country. What happens if there is further crisis in the financial system ; we would have the scenario of dragging taxpayers into a huge black hole if something like the derivatives market were to break down. I cannot see that this decision has other than an air of the roulette table about it. Why should the taxpayer be at risk because of stupid lending policies ? What happened to moral hazard ? This decision looks good today; what may it look like in six months time when we are all lumbered with bailing out the sinking western world debt ship ?
Ed, Oxford, England
Considering how Governements tend to wash their hands of collapses in the private sector we could be forgiven for viewing this reaction an admission of guilt on the part of the man whose policies have allowed this sad state of affairs to emerge.
Dean Talboys, Pune, India
Does this mean that I should now take my savings out of Nationwide and put them into the Rock, as there they will be guaranteed in their entirety?
I noticed the weasel words about during the current instability, yet in practice how long would it take for the government to cough up, and would any rate of interest that the Rock might choose to quote also be guaranteed?
I had always thought that nationalising the banks would be a good idea, yet this is rather a strange way to do it;-)
Charles Lucy, London, UK
Alastair Darling did the right thing simply because confidence is crucial in the finacial industry, and we were on the verge of a collapse of confidence. In Japan years of stagnation and deflation resulted from lack of confidence in the economy.
Having said that, one wonders how the management at Northern Rock got away with a stupid simplistic strategy of arbitraging the short term money markets against the long term illiquid mortgage market -- this is the strategy of most SPVs/ SIVs and conduits. The management of Northern Rock remained the same after it turned into a PLC and one must draw the conclusion that these were naive mortgage bankers who got into playing the markets without fully comprehending or stress testing the risks (liquidity gaps) that they took. The Treasury in any large money centre bank spends worrying about just this type of liquidity crises - especially after LTCM and 1992 situations. The management of NR perhaps never even appreciated the risks they took .
L. Banerji, London ,
James, Shang Hai
How liability much has Mr Darling just added to the UK balance sheet - £20billion? Since these liabilities are, ultimately, backed by UK land, bricks and mortar, we'd better hope that that they stay "healthy" (i.e. insanely high) or that he can get rid of this liability in a few day's time.
At least if the UK treasury owns the mortgage book of NR, it could provide a good pool of social housing in future.
Trevor, Limerick,
Now the BOE has become the 'sub-prime mortgage lender of last resort', can they ever raise rates again?
Pete Balchin, Solicitor , Bristol, UK
It's not difficult to anticipate the Chancellor's qualifications of this "explicit guarantee" down the line, when it is politically expedient to walk away from the "explicit guarantee" because it doesn't tally with future spending plans. There is no such word as explicit in a politician's vocabulary. Anyone who trusts this "explicit guarantee" must be off their trolley.
David Masu, Zürich,
The government urges every one not to panic while it does just that. Last week Alistair Darling told the city that the government would not bail out ailing business. Two days later it does exactly that.
Where is the Labour manifesto did it say that tax payers would be expected to underwrite bank deposits ?
Ubi, Edinburgh,
It's all very well promising to underwrite the reckless behaviour of Northern Rock but, as we all know, "Fine words butter no parsnips". Just wait till Northern Rock goes bust and see how Darling, Brown and co will manage to wheedle out of this commitment. It's not worth the paper it's written on!
ROBERT MURRAY, EPSOM, SURREY
Is it proposed that the taxpayer should underwrite the banks when they mismanage their businesses? The Northern Rock directors took large pay increases before this happened - now those pay increases are also secure. If Northern Rock does go bust then is the government going to manage the mortgage business? This whole debacle resulted from Northern Rock overextending itself and making loans which have stoked the increase in house prices and hence inflation. Supporting them only encourages this to happen again. What happens about savers' interest - I will still be taking my money out.
Peter Causton, Birmingham, UK
"should it be necessary, we, with the Bank of England, would put in place arrangements that would guarantee all the existing deposits in Northern Rock during the current instability in the financial markets."
This, from the government that brought you "we will hold a referendum on the Euro Treaty" - is it any wonder the queues continue?
Mike Bibby, St Albans, England -not EU
So our tax payers money is being used to bail out a company which has played fast and loose with it's accounts? Great, really encorages prudence and a people to take a realistic view of risk.
Alan, London,
Nice to know the Government wants to underwrite the UK Banking system. Given that most of the banks dont know whats on or off their balance sheets (witness Barclays Capital) and most dont even know how to value some of these assets - that is quite worrying. Ultimately when a major bank does fail due to taking excessive risks to benefit their shareholders - is it really necessary to bail such institutions out? There is a price to risk - with government intervention risk will be mispriced in the future.
KR, London, London
So what now. A return to 8xsalary loans perhaps? Self certified applications verified by commission based sales staff? Shall we maintain a society that wont release land for building the houses that have been so desperately needed for the past 30years or more as a result of entirely predictable in fact predicted changes?. Wasnt it the insurance world that started these low cost endowments in the late 60's that would pay off the loan at the end of its term. What is needed is government. Government that takes a strategic view and we havent had it for over 30years and this lot is the worst yet. WE all expect better and we deserve it.
alan, warks, uk
Weren't we promised a referendum on the EU treaty / constitution? No doubt the promise to Northern Rock customers is equally solid.
Simon, maidstone, uk
In emerging markets the behaviour of the UK government would be termed Crony Capitalism. That it's deemed acceptable in the UK tells you just what sort of government you have. Policy is now being dictated by an ex-journalist and a solicitor who are only interested in buying votes. It's disgusting.
mark mcfarland, dubai, uae
Government action on Northern Rock appears to have more than a whiff of panic about it! It's comical really when the Government attempted to use soothing words to calm savers and then ended up totally spooked themselves! Are we really to believe public money will underwrite the potential failure of Northern Rock? I think not as it would open Pandora's box. It's a calculated bluff! I hope the Government knows what it is doing! Remember Norman Lamont!
Rod Ballard., Leicester,
Will the British goverment now bail out any private enterprise which is in financial dificulty?
Stephen, Oslo, Norway
Are they now underwriting the entire British banking system?â€
A very good question.
I cannot see PM (Crash Gordon) Brown Unelect going to the polls this side of this time next year if they don't and even then asuming he does resolve this mess that he alone has created, it will be very difficult for him to find a window of opportunity...
Pete Balchin, Solicitor , Bristol, UK
I wish the Bank of England would give me a few billions of funding if I applied for it within 24 hours of a request being presented to them!
The support they give SME's is very lacking. Let the Banks get out of thier own problems like other commercial active companies have to from time to time when there is a change in markets and trends etc. They have made a poor business decision to lend so they have to take the consequences. I am sorry for all the savers who entrusted the respective banks with their money though.
Andrew Hall, Warfield, ~Berkshire
I fail to see why my tax should be spent to prop up Northern Rock's negligent lending and to paper over the massive cracks in financial regulation, put in place by Brown in 1997.
It's also amazing that £28bn can be found down the back of the Treasury's sofa. Why isn't it being spent on schools and hospitals?
Nobby Clark, London,
I hope that I am indeed rational & if a Government Minister, Alister Darling, the Chancellor of the Exchequer no less told me on Friday, that my savings in the Northern Rock was SAFE, I believed him.
Safe to me means safe & without risk.
Clearly I understood the normal bank guarantee but in view of the statement that my savings were safe I decided not to PANIC & keep my savings account open with the Rock.
Following the statement last evening by the government again that my savings are safe & guaranteed I am left wondering if that statement was indeed a clarification or a new statement that my savings are now SAFE.
If the latter that raises a bigger question - there is truth - & is there truth ?
M.McNeill, Neston, Cheshire/England
This leaves the credibility if the Bank of England in shreds.
Where were they when the likes of Energis or thousands of other U.K. companies went bust.
However they try to spin it,the Northern Rock was in effect bust,until the Bank of England did a massive U-turn on what it had said just a few days earlier and wrote them out a £4.5 billion pound cheque.
The government now underwrites deposits does it?
This will only add high octane fuel onto the out of control debt blaze.
The reckless board of Northern Rock have got away with it thanks to a bail out from our socialist government.
The thing is when the final bill arrives,guess who will have to pick up the very expensive tab?
The British taxpayer of course.
James, London, U.K
To Scamp of Aberdeen - the problem with Gordon Brown is that as Chancellor he ran a fiscal deficit during a period of unprecedented growth. This was very irresponsible and effectively mortgages all our futures.
Richard, Worcester, England
My company is having a thin time at the present. Will Mr Darling underwrite our business please?
Glyn Evans, Nottingham, England
Inveterate gamblers have themselves to blame when they go on sustaining losses and assume the dire consequences but when financial entities aggressively take on inordinate risks (in other words "gamble") to boost profitability they do not bother about the consequences since whatever happens there is always the Central Bank to come to the rescue! Should there not be a legal framework to make these entities and their managers criminally accountable for their irresponsible actions? This would deter future recurrences of situations we are witnessing and thus avoid the ensuing systemic chaos.If all bank deposits are guaranteed forthwith
I would be keen to open one myself!
tingsing, portlouis,
David Cameron needs to remember that his predeccessor one M Thatcher kicked off this process when she deregulated the City and let it do what it wanted to do. Ever since then it's the City that has run the UK's industrial strategy not Govt. The consequences are not just to be found in household debts and ridiculos house prices but also in the UK's trade deficit.
Gordon Brown in wanting to out Tory the Tories just built on Thatcher's legacy but with the added twist of stealth taxes.
Scamp, Aberdeenshire,
The government better hope there are no holes in Northern Rock's balance sheet, otherwise they have just bankrupted the entire country.
James, Shang Hai,