It Appears That Northern Rock Wasn’t Bankrupt- The BoE Should Have Supported It


As we know Northern Rock went bust during that little contretemps in the financial markets. The big question about this being whether N Rock was insolvent, or illiquid. The thing being, if it was merely illiquid then it should have been supported like all of the other banks. If it was insolvent then such support should not have been offered – as it wasn’t.

So? Well, it appears that it was merely illiquid:

The ‘bad bank’ which runs loans granted by Northern Rock and Bradford & Bingley before their financial crisis bailouts has repaid its £48.7bn taxpayer loan. UK Asset Resolution had not expected to repay the crisis-era loan until the mid-2020s but has been able to do so more quickly by selling off packages of loans to private equity buyers.

So, if it was insolvent then there should have been losses on that loan book. There haven’t been looses on that loan book. Therefore it would appear that Northern Rock was solvent but illiquid.

The central bank exists to lend money to banks that are solvent but illiquid. BoE decided not to so lend – uniquely to Northern Rock too.

Note again the logic here. If NR was busty bust, a la Whoopi Goldberg, then that loan book that was taken over should be showing a loss. It isn’t. Thus NR wasn’t busty bust. It was only bust, illiquid.

Just shows, government isn’t your friend, is it?