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Monday, 17 September 2007

Getting to the Soul of Northern Rock

John Redwood's reading of the situation is poor - but Guido Fawkes has called it right, but then Guido was a trader and Redwood was an investment analyst, so Guido probably understands these things better, even though he may have worn white socks.
Redwood implies that NR's problems come from the BoE leaving the discount rate too high - but if this were the case it would create systemic problems for all lenders, which apparently is not the case.
Alternatively there could be problems if there was a mismatch in the "basis" of funding (i.e. fixed vs floating), but this could happen at any time and does not appear to be the issue here.Ministers have told banks to lend prudently, but again that does not appear to be a problem especially for NR. The may have grown their loan book at fine rates of interest, but they aren't reporting serious write-offs and nobody is accusing them of imprudent lending policies - or at least no worse than any other bank.
As Guido points out, the issue is a classic case of liquidity risk. NR funded itself through the wholesale market, using short term commercial paper in particular, to a much greater extent than other banks who finance themselves with a more stable deposit base. Other banks may have very large demand deposit bases, but the sheer number of depositors ensures that they don't all their money back at once, unlike commercial paper programs which have a nasty habit of being repaid in large amounts.
If NR has problems, that is the fault of their management and to a lesser extent their regulators, but it is hardly the fault of ministers.So Guido has it right, ministers have it wrong (but with this lot you don't expect much), and to a certain extent Redwood and Fraser Nelson are wrong too.

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