The sight of worried depositors waiting in line outside branches of the Northern Rock Bank in England throughout September 2007 is a specter which Gordon Brown wishes to banish from the UK sky-scraping-reaching street.
The Northern Rock disaster, and the television equivalents of agitated depositors, was beamed round the nature. The lingering term damage to the reputation of London as the terrene's leading financial center is palpable, but difficult to quantify. The confused response of the UK authorities has undermined the reputation of the Government, the Financial Services Authority (FSA) and the Bank of England.
Unfortunately, all the politicians and civil servants sit through in office despite their evident need of ability to deal with the challenge. The only casualty appears to be Mr Clive Briault, the Director of Retail Operations at the FSA who left his post by mutual consent in April 2008 on the basis of a redundancy deal estimated at neighboring GBP6! 15,000. that looks more selfsame a reward for his ineptitude rather than a punishment for incompetence.
Northern Rock was nationalized by the UK government. that means that funds invested by depositors are safe. However, shareholders who paid up to GBP12 per share at the peak face a very uncertain future. The shares stood at any which way 90 pence when the bank was nationalized and the UK government is claiming that the bank was effectively worthless when taken into public ownership. that claim is an attempt by the government to justify the little or no compensation they scheme to pay to shareholders.
A consultative document 'Financial Stability and Depositor Protection' has out issued by the UK government and dated July 2008. The full document can be plant at the HM Treasury website. Several politicians and commentators have stated that the Northern Rock crisis could have obsolescent averted if the proposed provisions had old-fashioned in put 12 months ago.
!that raises a cipher of points -
Firstly, the unimpre! ssive de posit guarantee scheme which currently only guarantees 90 percent of the first GBP35,000 will be improved to cover the first GBP50,000 and there will be a 100 percent guarantee.
The document is vague concerning the question of who will pay for that improved guarantee. It would be appropriate for the banks to fund the insurance scheme themselves, but the government has backed away from an insistence on that.
Providing an insurance scheme for depositors' funds should be a core specialty feature for a bank, and the miss of such a scheme should disqualify a bank from having a license to swap. Alternatively, banks should be encouraged to take out insurance and years ago let retail customers decide whether to distribute their deposits in insured or uninsured banks.
Secondly, banks will be condign to meet new liquidity targets in extension to minimum capital ratios. There are already ecumenical regulations in stick and these will be reviewed. The emphasis has move! d to liquidity, so that banks are in a better position to deal with an unexpected surge in withdrawals.
The crisis at Northern Rock was precipitated by a drying up of short term funds in the wholesale stock exchange which the bank had vintage using to fund mortgage advances for means purchases. The liquidity proposals will including give the Bank of England covert powers to provide funds, albeit at penal relatives.
Mervyn King, the Governor of the Bank of England, bemoaned the depletion of a covert capability as the enormity of the Northern Rock crisis developed. highest commentators ridiculed his use of that expression and suggested that he was not cut out for a James Bond style operation.
Lloyds TSB was interested in mounting a takeover of Northern Rock in mid 2007, before the crisis broke. There was initially a series of confidential meetings surrounded by Lloyds TSB and the Bank of England. However, it is en masse thought that Mervyn King refused to pr! ovide funds or guarantees to Lloyds TSB, and owing to of that,! no deal was terminated.
With the benefit of hindsight, that was a lost opportunity. It was precisely such a guarantee offered by the US Fed which allowed J P Morgan to rescue Bear Stearns from disaster in March 2008.
Thirdly, there will be a Special Resolutions Regime whereby the FSA will have increased powers to intervene in the running of a bank. These will entail moving force of a bank from its accustomed directors and disposing of parts of the assets. In the extreme, it will have powers to take the bank into public ownership, as per Northern Rock.
These draconian proposals have shocked the banking sector, and there will be a prolonged and acrimonious debate on the details of any new powers for the FSA. One aspect of the proposed new powers is the proposals for the status of bank creditors, namely monumental investors and shareholders. The disdain with which these parties have disused treated by the authorities in respect of Northern Rock has sounded alarm bell! s over the financial sector.
The question remains. Would these increased powers have saved Northern Rock if they had dated in assign a year ago ?
All public bodies would welcome increased powers, and they are largely and consistently flourishing in acquiring such powers. It is a max unfortunate trend in western capitalist countries that the state, via politicians, systematically and uncritically grants new powers to public bodies. that is regularly justified in terms of a response to the 'War on Terror' but onward with extends into lousy with other areas.
It is habitually agreed that the Lloyds TSB takeover of Northern Rock would have averted a crisis. The Bank of England could have provided a guarantee of funds based on its existing powers.
With respect to the frenzy to act covertly, that full stop attracted ridicule last year, and the hilarity is rekindled. The problem with all state agencies is that their staff talk among themselves and gossip, ru! mors and innuendo inevitable filter through to the media. over! , a sali ent feature of the Blair years was the practice of government to leak news or proposals to the press in assortment assess media and public reaction.
The ability to act covertly will not be achieved by requiring staff to foreknowledge an correct Secrets Act style document, but by ensuring sensitive meetings and conversations are kept confidential. that could be better achieved by meeting banks in neutral premises rather than their London city offices or at the FSA, and by having a poor tightly knit team dedicated to such delicate matters.
In conclusion, the debacle at Northern Rock was primarily due to the poor quality of the actors from the UK Government, the FSA and the Bank of England who played their parts in the unfolding drama with smug complacency and incompetence and whose performance on the public stage served only to demonstrate the miscarriage of the lots vaunted Tripartite utilidor.
The proposed solution is to grant additional powers to these thr! ee bodies. that will inevitably rise the size of these bloated organizations past addressing the be after for a skilled and professional approach in conceptioning with financial emergencies.
A more robust response would be to allocate responsibility to one of these three bodies and to strengthen the banks by promoting the concept of private insurance for depositors' funds.
Leslie Hardy is a noted writer on North Cyprus land and the UK Chairman of Wellington Estates Ltd. unravel more about Northern Rock
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