Northern Rock Bank Faces Run on Deposits

Northern Rock is a bank in Britain. It hasn’t been making ridiculously risky loans, and it isn’t operating a trading division that owns a lot of complicated derivatives. Still in the last few days, people have been lined up before dawn to withdraw their savings, and the price of the bank’s stock is a fraction of what it was a week ago. The ripples from America’s subprime mortgage mess have reached across the pond.

The bank appears to be solvent and the £2 billion withdrawn as of Friday by panicked depositors appears to be around 8% of total deposits. This is actually less than the bank and authorities had feared. Nevertheless, Northern Rock has arranged a credit facility with the Bank of England just in case – a rare move and one that has set off alarm bells in some quarters.

Adam Applegarth, chief executive at Northern Rock, issued a statement saying, “Your money is safe with us and if you want some, or all of it back, then you are perfectly entitled to it. Whilst you may have to wait a little longer than usual to receive it, you will get it. However, your savings are secure and there is no need for you to withdraw your money based on our recent announcement, and the widespread media coverage that has ensued.” The UK insures deposits of up to £35,000.

The trouble with Northern Rock is the business model itself. Most banks obtain their funds to provide loans by taking deposits. Northern Rock does take deposits (which are falling by the minute), but most of its funding comes from sales of debt instruments into the wholesale market. Of late, no one wants to buy those instruments, which means funding for Northern Rock is drying up.

The bank isn’t doomed, but this over-reliance on the credit markets at a time when there’s a credit crunch doesn’t bode well for it either. Several possible purchasers have been mentioned in the press, and the Bank of England has stated any purchaser could continue to rely on the facility Northern Rock has. What’s needed is an influx of depositors’ money. The speed with which that happens will determine the future of the bank.

© Copyright 2007 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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