The sight of worried depositors waiting in line outside branches of the Northern Rock Bank in England over September 2007 is a specter which Gordon Brown wishes to banish from the UK sky-big street.
The Northern Rock disaster, and the television likenesss of agitated depositors, was beamed round the sphere. The running term damage to the reputation of London as the globe'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 pause in office despite their evident loss 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 any which way GBP615,000. that looks more congen! erous 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 nearby 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 reserve to pay to shareholders.
A consultative document 'Financial Stability and Depositor Protection' has unusable issued by the UK government and dated July 2008. The full document can be fashion at the HM Treasury website. Several politicians and commentators have stated that the Northern Rock crisis could have square averted if the proposed provisions had superseded in lay 12 months ago.
that raises a denominator of po! ints -
Firstly, the unimpressive deposit guarantee schem! e 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 career feature for a bank, and the absence of such a scheme should disqualify a bank from having a license to transaction. Alternatively, banks should be encouraged to take out insurance and when let retail customers decide whether to position their deposits in insured or uninsured banks.
Secondly, banks will be requisite to meet new liquidity targets in enlargement to minimum capital ratios. There are already foreign regulations in peg and these will be reviewed. The emphasis has moved 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 drugstore which the bank had unfashionable using to fund mortgage advances for plot purchases. The liquidity proposals will plus give the Bank of England covert powers to provide funds, albeit at penal estimates.
Mervyn King, the Governor of the Bank of England, bemoaned the shortness of a covert capability as the enormity of the Northern Rock crisis developed. max 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 among Lloyds TSB and the Bank of England. However, it is popularly thought that Mervyn King refused to provide funds or guarantees to Lloyds TSB, and s! ince of that, no deal was realized.
With the benefit of ! hindsigh t, 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 add moving government of a bank from its regnant 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 populous investors and shareholders. The disdain with which these parties have vintage treated by the authorities in respect of Northern Rock has sounded alarm bells overall the financial sector.
The question rem! ains. Would these increased powers have saved Northern Rock if they had old-fashioned in finger a year ago ?
All public bodies would welcome increased powers, and they are largely and consistently thriving in acquiring such powers. It is a highest unfortunate trend in western capitalist countries that the state, via politicians, systematically and uncritically grants new powers to public bodies. that is repeatedly justified in terms of a response to the 'War on Terror' but moreover extends into legion other areas.
It is broadly 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 fervor to act covertly, that count attracted ridicule last year, and the hilarity is rekindled. The problem with all state agencies is that their staff talk among themselves and gossip, rumors and innuendo inevitable filter through to the medi! a. to boot, a salient feature of the Blair years was the pract! ice of g overnment to leak news or proposals to the press in pattern assess media and public reaction.
The ability to act covertly will not be achieved by requiring staff to precursor an definite 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 mini 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 dud of the lots vaunted Tripartite fixed order.
The proposed solution is to grant additional powers to these three bodies. that will inevitably raise the size of these bloated! organizations out-of-doors addressing the depletion for a skilled and professional approach in pledging 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 home and the UK Chairman of Wellington Estates Ltd. decipher more about Northern Rock
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