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?

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Reform_the_NHS
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Reform_the_NHS

Having worked briefly on this, I suspect that the losses have been hidden somewhere – the way the loan book was organised (with over collateralisation of better rated debt, combined with lots of risky loans) meant that it was really clear that NR was insolvent. I suppose it’s possible that gains have been made on repossessed properties since 2008, enough to cancel the debt, but I’d look somewhere for the hidden write-offs. Btw it’s one thing for the BoE to bail out a temporarily illiquid bank, but NR was way beyond that point. It had funded long term loans with… Read more »

timworstall
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timworstall

Well, no, not really. The Granite bonds were the long term finance. Short term funding only covered loans made until there was the stock to issue more Granite. That’s what caught them, not being able to roll over the finance for that pipeline, not the whole loan book. And, you know NW got BoE liquidity finance, NR didn’t – which is rather the point.

Reform_the_NHS
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Reform_the_NHS

But it wasn’t just that. Unlike other lenders, who had various sources of funding, including – vitally – savers, NR was reliant on the (over-) collateralised bond market. It was trying to act like a big player, without the big players’ savings base (or a billionaire to fund them). And it did it without proper computerised systems – eg its savings books were still done by hand – the administrators were shocked. Even NW wasn’t that badly run – and had a diversified funding base. I’m no fan of HMT – after all it’s failures, particularly since the accession of… Read more »

timworstall
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timworstall

It wasn’t the bond market that did for them, it was the overnight. The bonds sold nicely, all have paid out, none in default etc. But a bond issue can only be done in a certain size. So, there’s some amount of mortgages issued which are funded by the overnight market waiting until there’s a suitable pile to be collateral for a bond issue. It was not being able to roll over that overnight money that killed NR. That’s a classic liquidity case. One which the BoE declined to finance. If NR was actually insolvent, not just illiquid, then the… Read more »

literate3
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literate3

The expropriation of Northern Rock was done on the basis “what would have happened IF the BoE withdrew support” (and involved a lot of lies). The BoE was not guilty, it was a *government* decision

Matt Ryan
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Matt Ryan

According to https://en.wikipedia.org/wiki/Nationalisation_of_Northern_Rock#Offshore_mortgage_book is was the substitution clauses that sank NR as the government couldn’t be sure these wouldn’t be triggered and have to stump up the £45B up front rather than a lot of it just being guarantees.

Mind you, that’s arguing after the fact. If the liquidity support was provided, the above was moot.

Matt
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Matt

I do wonder if NR’s records were so bad that the BoE — forced into making a fairly quick decision — took one look at it and went “we can’t determine if this is insolvency or merely illiquidity, but if this shambles is how they run their business then we are staying well clear” Most of NR’s business was in the North, and outside the centres of Leeds/Manchester/Liverpool and the fashionable bits of North Yorkshire, property prices up here are still below where they were in 2007, so, coupled with the remarkably low rate of property repossessions in the last… Read more »