September 15, 2007

A Run on the Bank!

WELL, I NEVER THOUGHT I'd see the day when crazed depositors would crowd bank branches demanding to take their money out, but that's apparently what's happened in the case of Britain's Northern Rock bank, which on Friday saw bunches of depositors crowd its branches around the country. Wow. Unfortunately, The Telegraph -- which I think has had the best coverage -- is having Web issues right now, but all the British papers are covering it.

THE TIMES: Run on the bank
THE TIMES: Tempers start to fray as panic-stricken pensioners demand their money back
THE GUARDIAN: Between Rock and a hard place: savers besiege bank
THE GUARDIAN: "They've got a problem if a director is here."
THE GUARDIAN: Banking shares suffer amid fears of another Northern Rock
THE INDEPENDENT: "Takeover may be Rock's only hope"

So how much did the panicked depositors take out? Oh, try about £1 BILLION. (That was according to The Telegraph, which isn't loading up). That's roughly 4 pc of the bank's £24 billion in total deposits.

It seems extremely unlikely Northern Rock will actually fail, however. The Bank of England has agreed to step in and lend it money to make sure Northern Rock meets all its obligations. However, I can still see why people are crowding the branches in desperation to try and get their money out. Since the British equivalent of the FDIC only insures the first £2,000 in an account pound-per-pound, anything above that is subject to at least some kind of loss. The regulators will cover 90 pc of the next £35,000, but beyond that, you're on your own.

This serves as yet another reminder why it pays to Not Put All of One's Eggs in One Basket. Here in the U.S., bank and credit union deposits are fully insured up to $100,000; while brokerage deposits are insured through the SIPC (cash up to $100,000; cash and securities up to $500,000). Still, it makes sense to start spreading the wealth around even before one gets to that point. I mean, I don't know about you, but the last thing I want is to go through what must be the Not Fun Process of trying to get my money back from a failed institution, and I'd REALLY hate to go through it if ALL my money was in the place.

In Northern Rock's case, there were many reports of people withdrawing hundreds of thousands of pounds on deposit with the bank, and in one case, as much as £1 million. The couple who had the million pounds on deposit barricaded a bank manager in her office when they were told they couldn't take all the money out without notice.

Still, it seems about all Northern Rock's troubles will amount to is a lot of heartburn. With the Bank of England's offer to lend the institution money, it should remain sound even as it figures out how to refinance nearly three billion pounds worth of short-term commercial paper over the next six months. This, you see, was the Rock's Achilles heel. It borrowed billions on the credit markets to lend out to homeowners. Unfortunately, with the subprime crisis and subsequent credit crunch, it can't get that money any more -- which is why it's borrowing from the Bank of England, and at a Not Fun Interest Rate.

But what if it turns out the heartburn is indicative of something really bad? The worst thing, of course, would be if OTHER banks started saying, "Gee, we can't get any money from the credit markets either, and we need help." That could make Northern Rock's issues look tame in comparison. And then, of course, there's the larger issues with Britain's economy.

Apparently, Northern Rock was a pretty aggressive mortgage-lender. Although it didn't have a lot of sub-prime exposure, it made some pretty "out there" loans -- including some that offered homeowners mortgages up to 125 pc of the value of their homes. (Uh, OK). And Britain's mortgage market is weird -- apparently, most people have ARMs as opposed to fixed mortgages. And housing prices have actually fallen a bit over the past year, following years of appreciation.

Gee. This sounds familiar.

The danger -- although one that's still far out on the horizon at this point -- is that Britain will spiral down into recession as its housing market stumbles, consumer spending stalls or falls and investors start looking for other places to put their capital. And if Britain catches cold, it could spread.

It doesn't seem to make sense to actively worry about this -- if it happens, no one will be able to stop it -- but I do think it's yet another sign people should consider whether to be a wee bit more cautious about their own affairs. In other words, save more, spend less, and put off big purchases until you get in a stronger financial position.

Of course, I realize some readers might suggest this advice, if everyone followed it, would actually send the economy into recession. But I'm not too worried. Most people don't tend to tighten their belts until it's too late.

Posted by Benjamin Kepple at September 15, 2007 12:01 AM | TrackBack
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