by Calculated Risk on 2/17/2008 12:48:00 PM

From the Financial Times: Northern Rock to be nationalised

Northern Rock ... is to be nationalised, the UK Treasury announced on Sunday.
...
The government would introduce legislation for the move on Monday. UK listing authorities will suspend the company’s shares prior to opening of the London stock market.

Taxpayers are subsidising the bank in loans and guarantees to other lenders totalling £55bn. [Alistair Darling, chancellor of the exchequer] said he expected these to be repaid.

“It is our expectation that the company can be moved back into the private sector at the earliest and most opportune opportunity,” he said.

MarketWatch has the Statement by U.K. government on Northern Rock

by Calculated Risk on 1/15/2008 11:32:00 PM

From Bloomberg: Brown Says U.K. May Take Over Northern Rock, Resell

Prime Minister Gordon Brown, in his clearest indication yet that Northern Rock Plc may be nationalized, said the U.K. is considering acquiring the mortgage-lender and reselling it when market conditions recover.

``Because stability is the issue, we will look at every option and that includes taking the company into public ownership and then moving it later back into the private sector,'' Brown said in an interview with ITN's News at Ten program last night. ``So that is, yes, one of the options that has got to be considered.''

The U.K. Treasury said it may nationalize the bank in order to recover more than 25 billion pounds ($49 billion) in loans it made to Northern Rock and to protect depositors.

And here are the betting lines from MarketWatch (everything in England seems to have betting lines):

Spread-betting firm Cantor Index is offering odds of 5-to-1 on Virgin winning and 7-to-2 on Olivant. Nationalization of the bank, however, is the clear favorite with Cantor at odds of 1-to-8.

The bettors clearly think that Northern Rock will be nationalized. Heck, the New England Patriots are overwhelming favorites to win the Superbowl, and the odds are only 2-to-7.

by Calculated Risk on 11/19/2007 10:58:00 PM

UPDATE: WaPo leads with a similar headline: Fallout From Credit Crunch Creates Another One

From the Telegraph: Libor soars as credit crunch returns (ha tip Viv)

The credit crunch is returning in a virulent form ... after City banks raised their wholesale lending rates to the highest level in two months.

Morgan Stanley said that the recent jump in the benchmark London Interbank Offered Rate, which yesterday rose to just under 6.45pc, was ... a major warning sign of pain ahead ... it was Libor's increase in August that signalled the initial impact of the credit crunch.

The UK is still struggling with the Northern Rock situation, but this is not a good sign.

by Calculated Risk on 9/22/2007 06:01:00 PM

From Bloomberg: U.K. May Insure 100,000 Pounds of Depositor Funds (hat tip FFDIC)

The U.K. government may guarantee as much as 100,000 pounds ($202,000) of people's bank deposits as it seeks to avoid a repeat of the run on Northern Rock Plc, Chancellor of the Exchequer Alistair Darling said.

Currently the official deposit insurance program covers 100% of the first £2,000, and 90% up to £35,000. This is a flawed insurance program, and didn't prevent the bank run at Northern Rock. To stop the bank run, the British government ended up guaranteeing all deposits - talk about encouraging moral hazard!

Although most people think deposit insurance is intended to protect depositors, perhaps a more important reason for insurance is to prevent bank runs and maintain the stability of the financial system.

The problem with the current British system isn't the size of the insured deposit £35,000 (about $70,000) but the coinsurance feature above £2,000. The coinsurance idea is flawed, both in concept and in practice (see Northern Rock). The idea of having relatively small depositors assess the risk of a bank is absurd. In practice, small depositors will just move their deposits to another bank at the slightest hint of trouble.

Many other coinsurance programs work very well. As an example, a co-pay for a doctor's visit lowers the overall cost of medical care. Without a co-pay, some patients overuse the services of doctors (this isn't a discussion of health care, rather an example of a positive aspect of coinsurance). But the purpose of coinsurance for deposit insurance is to encourage the depositor to assess the risk of the institution - something perhaps beyond the capability of most depositors. And even if the depositor has the skill to assess the institution, and the access to adequate information, it is still easier to just move their funds.

There are Moral Hazard and Principal/Agent issues with deposit insurance. For those interested in this topic, I suggest this paper, written in 1999 by George Hanc at the FDIC: Deposit Insurance Reform: State of the Debate. Here is an excerpt on Moral Hazard:

When applied to deposit insurance, the term moral hazard refers to the incentive for insured banks to engage in riskier behavior than would be feasible in the absence of insurance. Because insured depositors are fully protected, they have little incentive to monitor the risk behavior of banks or to demand interest rates that are in line with that behavior. Accordingly, banks are able to finance various projects at interest costs that are not commensurate with the risk of the projects, a situation that under certain circumstances may lead to excessive risk taking by banks, misallocation of economic resources, bank failures, and increased costs to the insurance fund, to solvent banks, and to taxpayers.

Moral hazard is present because (1) a stockholder's loss, in the event a bank fails, is limited to the amount of his or her investment; and (2) deposit insurance premiums have been unrelated to, or have not fully compensated the FDIC for, increases in the risk posed by a particular bank. Moral hazard is particularly acute for institutions that are insolvent or close to insolvency. Owners of insolvent or barely solvent banks have strong incentives to favor risky behavior because losses are passed on to the insurer, whereas profits accrue to the owners. Owners of nonbank companies with little capital also have reason to favor risky activities, but attempts to shift losses to creditors are restrained by demands for higher interest rates, refusal to roll over short-term debt, or, in the case of outstanding longterm bond indebtedness, restrictive covenants required when the bonds were issued.

Probably the most effective counterforce to moral hazard is a strong capital position. Because losses will be absorbed first by bank capital, the likelihood (other things being equal) that they will be shifted to the FDIC diminishes as the capital of the bank increases. In addition, increased capital serves to protect creditors and helps reduce distortions in bank funding costs caused by deposit insurance. Capital regulation, therefore, tends to curb moral hazard, as do other forms of supervisory intervention--specifically the examination, supervision, and enforcement process. Moreover, risk-based capital standards and risk-based insurance premiums attempt to impose costs on banks according to the institutions' risk characteristics.

In the U.S., the insurance premium is based on the FDIC's evaluation of the riskiness of the institution. The FDIC is in a much better position to judge the riskiness of institutions than depositors.

Placing the burden on the depositor defeats the purpose of deposit insurance:

Proposals for exposing depositors to greater risk seek to induce depositors to increase their monitoring of bank risk and, by means of their deposit and withdrawal activity, discipline and restrain risky banks. However, increasing depositors' risk could defeat the very purpose of deposit insurance.

...one should bear in mind the following considerations: (1) the relative cost of acquiring the information and analytical skills needed to monitor bank risk as compared with the cost and/or inconvenience of shifting funds to alternative investments entailing little risk; (2) the ability of depositors (and other market participants) to monitor bank risk effectively on the basis of publicly available data, given the 'opaque' quality of bank loan portfolios; and (3) the threat to the stability of the banking system resulting when potentially ill-informed depositors have greater risk exposure.

If the U.K. is going to offer deposit insurance, my suggestion would be to set the limit to cover the total deposits of say 98% of all depositors (£35,000 might be sufficient), and eliminate the coinsurance feature (insure 100% to £35,000).

by Calculated Risk on 9/17/2007 02:37:00 PM

Note: Video of the Day (bottom of posts) is an interview with customers in a Northern Rock queue this morning.

From the Guardian: Government guarantees Northern Rock deposits

The chancellor of the exchequer, Alistair Darling, this evening promised that the government will guarantee all savings deposits at Northern Rock amid concern that Britain is plunging into its worst banking crisis in decades.

The move follows a dramatic last-minute collapse in the share price of Alliance & Leicester, which fell 32% in late trading this afternoon, and sparked fears of "contagion" from Northern Rock to other financial institutions.

Mr Darling said: "I can announce today that following the discussions with the Governor (of the Bank of England) and the Chairman of the FSA, should it be necessary, we, with the Bank of England would put in place arrangements that would guarantee all the existing deposits in Northern Rock during the current instability."

This evening queues were still stretching out of the door at branches of Northern Rock across the country, with more than £2bn already taken out by anxious savers. The value of Northern Rock shares fell sharply again today, down by 35%, but in late trading it was overtaken by a startling drop in the share price of Alliance & Leicester, Britain's seventh largest bank.
...
Northern Rock, in a formal statement issued after the Mr Darlling spoke, said that "The Chancellor's statement makes it clear beyond any doubt that all savings in Northern Rock are safe and secure. Consequently anybody who is in a queue outside a branch, or who is trying to access an online account can be fully reassured that there is no cause for concern whatsoever."

It also promised to refund any penalties that savers may have paid when they withdrew their funds from the bank - so long as they put the money back in by October 5. "Any customer who paid a penalty to withdraw their funds from Northern Rock, due to concern over the current situation, will have the penalty refunded if they reinvest those funds in the same type of account with Northern Rock by 5 October 2007," it said.

These are stunning developments in the UK. Clearly there is concern that the run at Northern Rock will spread to other institutions (like Alliance & Leicester).

The UK version of FDIC insurance actually motivates many depositors to remove their bank deposits. Only the first 2000 pounds is 100% guaranteed, and the next 30,000 (or so) is 90% guaranteed. No one wants a 10% haircut, so it makes sense to remove any deposits over 2000 pounds.

This new guarantee should calm depositor's fears.

by Calculated Risk on 9/17/2007 10:47:00 AM

From Paul in London. Northern Rock branch in Hounsditch, City of London on Monday.

From Paul in London. Northern Rock branch in Hounsditch, City of London last Friday at 3 PM.

From Bloomberg: Lending Rates Surge as Northern Rock Concern Deepens

Photo: Northern Rock customers queue from the banks entrance,left, onto the pavement outside the branch in Golders Green, London, on Sept. 17, 2007. Photographer: Will Wintercross/Bloomberg News

by Calculated Risk on 9/15/2007 09:14:00 PM

From the Telegraph: Angry savers force Northern Rock to be sold (hat tip FFDIC)

Northern Rock, the crisis-hit bank under siege from thousands of its customers, was preparing itself last night for a sell-off, The Sunday Telegraph can reveal.

One plan being worked on by City bankers was to divide the company's £100 billion mortgage portfolio between the other major banks, in what would amount to a private-sector rescue of the lender.

And The Times: Bankers fear £12bn run on Rock (hat tip Barley)

NORTHERN ROCK, the mortgage bank rescued by the Bank of England last week, could see as much as £12 billion - nearly half of its deposits - withdrawn by worried savers, experts say.
...
Senior executives at Northern Rock spent yesterday at its New-castle head office monitoring events, but the lender is seen to have little future as an independent entity. It held talks about a possible takeover by Lloyds TSB before the crisis and is expected to be sold off cheaply to a rival.

The Guardian reports: Fears grow for British economy as panic over Northern Rock spreads

US Treasury Secretary Hank Paulson flies in to London tomorrow to discuss the worsening global credit crisis with Chancellor Alistair Darling, as fears intensify that the lending squeeze could be the last straw for Britain's buy-now-pay-later economy.

by Calculated Risk on 9/15/2007 04:39:00 PM

From the Telegraph: Customers outside a Northern Rock branch in Kingston Upon Thames.

From the Telegraph: Police help to disperse Northern Rock queues (hat tip DannyHSDad)

Northern Rock has apologised to customers who spent a second day queuing to withdraw money after the company asked the Bank of England for emergency funding.

A spokesman has asked customers to remain calm and repeated assurances that money is available.

The bank's website had crashed but is currently running with a message asking users to be patient and claiming that transactions will be dealt with.

Long lines formed at 72 branches across the country even before counters opened this morning.

Here is a Bloomberg article: Northern Rock Experiences Second Day of Withdrawals (hat tip energyecon)

A key question is: Does the UK have something similar to the U.S. FDIC insurance?

I've found this: the Financial Services Compensation Scheme

1. I have my money in a joint account in a High Street bank. How would FSCS pay compensation if the bank failed?

The compensation limit of £31,700 applies to each depositor for the total of their deposits with an organisation, regardless of how many accounts they hold or whether they are a single or joint account holder. In the case of a joint account FSCS will assume that the money in that account is split equally between account holders, unless evidence shows otherwise.

This means that each account holder in a joint account would be eligible for compensation up to the maximum limit.

by Calculated Risk on 9/14/2007 08:35:00 PM

From the FWDailyNews: Midwest commercial real estate index tanks (hat tip vader)

The Midwest led the biggest-ever drop in the national quarterly commercial real-estate index compiled by the Society of Industrial and Office Realtors.

The national index dropped nearly 4.5 points, to 113.7, for the summer of 2007. That is the weakest score since SIOR began compiling the index nearly two years ago.
...
Nationally, the weakness was broad-based, with all 10 components measured in the index down from the spring. The industrial market was the hardest hit, scoring 112.3, down about 7 points. The office market dipped less than 1 point, scoring 114.9.

This article is referring to the August survey. The SIOR puts out a CRE report every quarter (the Q3 report isn't on their website yet), but here is the Q2 report. SIOR is the Society of Industrial and Office Realtors®.

This index might be worth watching.

by Calculated Risk on 9/14/2007 09:01:00 AM

UPDATE: From Paul in London. Northern Rock branch in Hounsditch, City of London 3.12pm today.

Photo from the Guardian, credit Sang Tan/AP.

From Bloomberg: Northern Rock Customers Crowd London Branches, Withdraw Money

Hundreds of Northern Rock Plc customers crowded into branches in London today to pull out their savings after the mortgage-loan provider sought emergency funding from the Bank of England ...

2nd Photo from BBC.

The Bank of England said it will provide emergency cash to Northern Rock, Britain's third-largest mortgage provider, in the nation's biggest bailout of a financial institution in 30 years. The rising cost of credit left the lender unable to make new loans and stoked concern among customers about their money.

It looks like the older customers stand in the queue; there is probably an online bank run too.

by Calculated Risk on 9/13/2007 08:26:00 PM

From AFP: Bank of England to bail out British lender: reports (hat tip Brian jb Carlomagno sk)

According to the BBC and the Financial Times newspaper, Britain's fifth-biggest mortgage lender has struggled with lending since a credit market squeeze over the summer after concern sparked by uncertainty in the US subprime mortgage sector.

They said that the Bank of England (BoE), Britain's central bank, had agreed to provide short-term lending to Northern Rock to help it see out the crisis in what the FT described as the most dramatic development in the UK banking market since the crisis began.
...
John McFall, chairman of the parliamentary committee that oversees financial issues, urged the lender's customers to stay calm.

He said Northern Rock's request for funding should be seen as "reassuring, because it means they think the problems are temporary."

The article notes the letter BoE Governor Mervyn King sent yesterday:

In a letter to McFall's committee on Wednesday, BoE Governor Mervyn King warned that providing short-term liquidity to the financial markets while they were experiencing trouble served to encourage "excessive risk-taking and sows the seeds of a future financial crisis".

"The provision of large liquidity facilities penalises those financial institutions that sat out the dance, encourages herd behaviour and increases the intensity of future crises."

So much for tough talk.