Sep 162007
 

The fact that the Northern Rock is undergoing the beginning of a “bank run” will not be surprise to anyone reading this; it is all over the news at the moment. It is understandable that people want to take their money out of Northern Rock; in some way perhaps people are remembering the bank crashes during the 19th century when many people lost all their savings. But we live in a very different society these days.

In a way bank runs are a self-fulfilling prophecy; an unsupported bank will crash during a bank run even it is otherwise healthy. No bank keeps enough cash in the till to pay out to all their savers; they need that money to lend to others so that a saver earns interest! The only hope an unsupported bank has is that the panic will fizzle out before they run out of money.

But the Northern Rock is not in that position as the Bank of England is standing behind them as the “lender of last resort”. What people don’t realise is because the Bank of England is always available as the lender of last resort, other banks who are being cautious may not lend Northern Rock money when without that lendor of last resort, they could well do. And the Bank of England is not going to lend money to a lost concern.

There are two things that make the panic amongst Northern Rock customer more than a little silly. Firstly it seems there is full government protection for depositors with less than £35,000 in their account (something that should be trumpetet a bit louder). Secondly Northern Rock has not used the ‘lender of last resort’ facility as yet … they arranged the facility just in case.

The funny thing is that people are busy trying to read something into the fact that the apparent average age of the person queueing is in the “grey zone”. Use some sense people! Most young people have to work … which kinds of limits the amount of time one has to queue outside a bank, and those who don’t work don’t tend to have much in the way of savings.

There are a couple of opposition politicians who have made a speach about the problems. They are busy throwing rocks at the government and the banking sector for alleged failures … now is not the time for that sort of thing. Politicians throwing rocks is to be expected of course, but now is not the time to do anything to undermine public confidence. Of course you can expect politicians to do anything for their own advantage rather than put the public good first. Are you listening David Cameron and Vincent Cable ? If the current situation gets any worse, you will have to carry some of the blame.

By all means come back to this subject later when things have settled down a bit.