What caused Northern Rock to ..

[El Cid]

Settle an argument for me, a drink fuel discussion last night.

 

What caused Northern Rock to go bust?

 

Myself and my drinking buddy had a different reason, I will tell you later.

[hauxwell]

Wasn’t it something to do with lending money, which they didn’t have.

I use to bank with them and I thought I was going to lose my

savings until Gordon Brown said it was safe.

[ECCOnoob]

The BBC nicely sums it up....

 

"...Rather than using customer deposits as the source of funds to lend out to homeowners, it borrowed in the international money markets.

 

When the sub-prime crisis hit America, those markets took fright, and stopped lending to anything that looked like it might be over-exposed to the housing market. Northern Rock was an obvious first casualty..."

https://www.bbc.co.uk/news/business-41229513

[El Cid]

My friend confirmed his view tonight, he says that the bank was made bankrupt by the people queueing at their doors trying to get their money out.

He is quite sure about this. Not related to bad lending at all.

[ez8004]

My friend confirmed his view tonight, he says that the bank was made bankrupt by the people queueing at their doors trying to get their money out.

He is quite sure about this. Not related to bad lending at all.

 

Your friend has a very misguided view on the size of the banks retail saving assets versus the rest of its operations.

[El Cid]

On 22 February 2008, the bank was taken into state ownership.

 

The bank planned to repay the government debt within three to four years, primarily by encouraging mortgage customers to take their mortgage to another lender. Costs were also reduced by reducing numbers of staff.[24] As of 3 March 2009, the bank was repaying the loan well ahead of target, owing a net balance of only £8.9 billion of the loan which stood at £26.9 billion at the end of 2007.

 

By October, customers appeared to be regaining confidence in the bank, when it emerged that there had been a surge in the number of new accounts which had been opened.

 

Former shareholders and hedge funds also took legal action in January 2009 to get compensation for their shares; the shareholders lost the case.

 

I guess its the shareholders that lost out; I had an email today saying that The Royal Bank of Scotland are starting to pay dividends again.

 

If you leave out all the detail about share holders losing money, RBS looks like a profitable bank too, lol

[Anna B]

My friend confirmed his view tonight, he says that the bank was made bankrupt by the people queueing at their doors trying to get their money out.

He is quite sure about this. Not related to bad lending at all.

 

As soon as people heard their money in Northern Rock Bank might be lost, they began queuing to try and get their deposits out.

No bank holds enough money to cover all the deposits at any one time, so eventually it has to close its doors to customers, to stop any more going out, or because it simply doesn't have any money left. This causes panic in the financial markets. It's called 'a run on the banks.'

 

But the original cause (why customers thought their money might be lost in the first place,) began in America, and was very much to do with bad lending.

 

Put simply, Banks make money from lending money as loans and getting it back with interest. In the 1980s the banks were deregulated, meaning the safeguards were abandoned and the brakes were taken off lending. Margaret Thatcher did the same thing here.

 

The banks saturated the market with 'fiat' money. Fiat money isn't backed up with gold or anything substantial, it's simply created at will on a computer, then it's paid back in real money by the borrower, with interest, making it very lucrative for the banks. They couldn't lend it fast enough.

 

Eventually they started lending it to very risky people, called the 'sub-prime market.' They knew that some of these people would not be able to pay it back, so they bundled these dodgy loans up with other 'good' loans and sold them on to other banks, infecting the whole money market system. Eventually the system overheated wth too many people defaulting on repayments, and there was a frantic rush to sell the packages on (think pass the parcel) and not get stuck with them on their books.

 

This started a massive devaluation, bank shares began to crash and there was a run on American banks, particularly Mac and Fannie May, this led to the fall of Lehman Brothers, a sprawling Global bank that was thought to be invincible, starting a major worldwide banking crash in 2008. The rest followed like toppling dominoes.

 

The banks were saved by massive 'Quantatitive Easing' ie printing money to the tune of hundreds of billions to pay off the debts. The ripples from the crash continue today, we are still in a terrible mess, with everything from Austerity, the bloated property market, and 0% interest. And still the banks haven't learned their lesson, there could be another crash round the corner, and this time they probably wouldn't get a bailout so heaven knows what will happen.

 

This is very simplified of course, but there's loads about it on the net. Try this for a start.

https://www.economist.com/schools-brief/2013/09/07/crash-course

Edited August 28, 2018 by Anna B

[El Cid]

But the original cause (why customers thought their money might be lost in the first place,) began in America, and was very much to do with bad lending.

 

 

It has made me think about what we say has 'caused' something and peoples lack of information.

Maybe the NR would have been saved, had it not been for people withdrawing their money.

[Annie Bynnol]

It has made me think about what we say has 'caused' something and peoples lack of information.

Maybe the NR would have been saved, had it not been for people withdrawing their money.

 

The amount of money in savers accounts in Northern Rock was a small relative to its business but had a massive psychological effect on confidence of those lending millions to it. NR had already passed the tipping point before the first panic. As Ann says it had made a fatal error of judgement in its drive to become a "big operator".

 

At the time very few borrowers could take out more than £250 at a time and anyway the first £2,000 was protected and 90% of the next £30,000 by HMG. It's actually quite scary to know that your bank only had 2% of your money in the safe, 98% has been lent out.

 

Passing NR daily at 07.30 each day I saw, mainly pensioners, queuing in their dozens on day 1 and 2. On the third day there was a solitary flat cap, with folding chair and flask!

 

The guarantee is now £75 000/£150 000 for couples, up to a maximum fund of £40 billion.

Edited August 28, 2018 by Annie Bynnol

[Marsaud]

My friend confirmed his view tonight, he says that the bank was made bankrupt by the people queueing at their doors trying to get their money out.

He is quite sure about this. Not related to bad lending at all.

 

The run on the bank was a symptom, not a cause.

 

NR has been a basket case for quite a while anyway, dabbling in sub-prime derivatives left it and many other institutions unable to quantify its liabilities. As the pack of ccards fell, NR was just one victim. As it became clear it couldn’t survive, people queued to get their money out before it was too late. That bit made good TV.

 

If you haven’t already seen it, The Big Short is worth a watch. Not totally factual, but close enough to give you an idea of what went on.