Anatomy Of A British Bank Run
September 23, 2007 at 1:23 pm | In bailout, bank of england, northern rock | Leave a CommentThe 1860’s were a very turbulent time for Britain. The country had just lost the American Civil War and the abolition of the African slave trade was no doubt having effects on the overall economy. In this environment, Overend, Gurney and Company, the so called “bankers’ bank”, spectacularly collapsed in May 1866, owing about 11 million pounds (probably about £6 billion in todays money). At the time Overend, Gurney & Co, had a turnover double that of all its competitors and was the second wealthiest bank in the country. Only the Bank of England had more money.
What caused the collapse?
In 1862, 500 new limited companies were registered in Britain. By 1865, nearly 1,000 companies were registered because of changes in liability law, making it easier for individuals to register companies and not face liability in case they went bankrupt. Many of these new companies were promoted fraudulently, but the bank paid little attention to the finer details, making credit easily available.
Ironically a key source of this credit were new types of ‘finance companies’ which would accept poorer securities from ‘farmers, tradesmen, domestic servants, peers, and peasants’ a market that traditional money lenders did not do business with. These new finance companies were able to charge much higher interest rates and as the bankers bank, Overend Gurney provided the liquidity to these new finance companies. Unsurprisingly, defaults quickly rose as many of the new companies went bust. Overend Gurney began to feel the pressure and in 1865, in an effort to offset losses and increase liquidity, management at ‘the bankers bank’ decided to take the company public. Subsequently Overend Gurney was converted into a joint stock company under the new regulations but the banks management did not disclose the full extent of their liabilities to the public and regulators.
Laden with bad securities and unable to make calls to nervous shareholders, Overend Gurney began collapsing in the early months of 1866. In May 1866, the ‘bankers bank’ went into liquidation owing £11 million to shareholders and the public. As a result of the Overend Gurney collapse, nearly 300 companies including other banks also failed, causing one of the worst financial disasters in British history, forcing Parliament to suspend the Bank Charter Act. The directors at Overend Gurney were tried for fraud, but miraculously escaped prison. In fact the Gurney family, being one of the most respected banking dynasties in England survived the scandal sufficiently unscathed to become founding partners in Barclays Bank 30 years after the 1866 crash.
The Overend Guerney crash of 1866 was the last recorded bank run in the UK, before Northern Rock PLC lost over £2 billion, starting 14th September 2007. The similarities are scary.
Further Reading
Overend Guerney
1911 Encyclopedia
Spectator
Taylor
Northern Rock
Peston
Renthusiast
Has Merv lost the plot?
September 14, 2007 at 5:44 pm | In bailout, bank of england, crash, credit crunch, northern rock, subprime | 1 Comment
Word on the street is that BoE Governor Mervyn King may be ‘loosing the plot’.
In a stunning and uncharacteristic reversal on his word, King agreed with the FSA and other government regulatory bodies to do almost exactly what he said he wouldn’t do and that is to use BoE resources and bail out ‘unwise lenders’.
Surely ‘unwise’ is relatively tame to describe what the Rock has done – actually increasing the amount of loans on their books for the first half of this year, when all indications were that the market was going south, coupled with steadily rising interest rates, high inflation, the summer floods and decreased consumer spending:
In the first six months of 2007, its net lending rose 47 per cent to just under £11bn. And at June 30, it had a further £6.2bn pipeline of loans that had been agreed with customers but not yet delivered … [w]hat’s perhaps even more embarrassing for Northern is that in its interim statement made earlier this summer, it was explicit that it continued to lend even as the interest rate environment turned against it.
[Peston]
Clearly that decision was unwise, but is Merv’s decision any unwiser? Is he now under political duress to bail out banks?
Check the Northern Rock statement released today concerning the bailout:
…Northern Rock has agreed with the Bank of England that it can raise such amounts of liquidity as may be necessary by either borrowing on a secured basis from the Bank of England or entering into repurchase facilities with the Bank of England. Such repurchase facilities would include securities that have prime residential mortgage assets as underlying collateral. The collateral that can be used under this ‘Repo’ facility is similar in nature to the collateral currently utilised by many Eurozone banks with the ECB. This additional source of funding will enable Northern Rock to adapt its business model in line with the developing market conditions.
OK so get this, what Merv has actually done is collateralize the bailout using – guess what- “prime [read sub-prime - 'cause that's NR's main business] residential mortgage assets.”
So the BoE – yes the Central Bank of England, Wales and Scotland – has now become a prime/sub-prime mortgage lender. But that’s not the worse of it; now NR decides to adapt a business model in line with ‘developing market conditions’; and King supports this?
To give yourself an idea of just what those conditions are, read what Rightmove had to say this afternoon about developing market conditions, then decide for yourself whether or not King is indeed – losing the plot.
"NO NEED TO PANIC !" as Northern Rock effectively goes bust
September 14, 2007 at 5:37 am | In bailout, bank of england, credit crunch, mortgage, northern rock, subprime | Leave a CommentThe writing’s on the wall for UK sub-prime industry as Northern Rock arguably the biggest sub-prime mortgage bank in the UK effectively goes bust, were it not for another Bank of England bailout; yet some politicians feel that there is ‘no need to panic‘.
However, there certainly is need for concern in Northern Rock’s situation because the cash crunch problem affecting UK lending institutions, is being caused mainly by irresponsible lending in US housing, particularly the sub-prime market.
Northern Rock, solely a UK lender, brings the problem close to home.
The actions by the UK central bank appear in some way to contradict the policy Mervin King outlined a few weeks ago, when he stated that the Bank of England would not support ‘unwise lenders’, although his comments were with regards to interest rate policy. However, today’s bailout indicates he may be having a problem sticking to his words
Comments on Wall Street jitters and UK housing
August 10, 2007 at 4:46 pm | In bank of england, ftse, housing market, subprime, wall street | 24 Comments
Reputable economist Fionnuala Earley of Nationwide Building Society this afternoon released the following statement on the Wall Street selloff and its potential impact on the UK housing sector:
the implications for the UK housing market … could mean that wholesale funding costs will increase and that lenders tighten up their own criteria, particularly those that are very dependent on wholesale funding. However, if the Bank of England see these current developments as a real threat to the City, this is likely to reduce the risk of further increases in interest rates, counteracting some of that effect.” [emphasis added]
Earley’s comments are somewhat contradictory in nature to the tone Mervyn King and the BoE set in his press conference 2 days ago. Paul Tucker, the banks Executive Director for Markets stated that the fundamental pressures in the financial markets – driven mainly by the subprime crises – was isolated.
King said that he doesn’t make any predictions on the housing market, but that he was ’surprised’ by housing’s resilience. He adamantly stated he would not use interest rate policy to bail out ‘unwise lenders’ and claimed to find no real challenge to the global ‘macro-economic outlook’.
However, it appears central banks around the world beg to differ with King’s analysis. In response to the crises, Japan’s central bank injected one trillion yen (£4.2bn) into the Tokyo market, The European Central Bank pumped €61bn (£41bn) into European markets; Bernanke’s Fed added $24bn (£12bn) to the US banking system and the Australian central bank took similar action.
What prompted the interventions from the central banks was that overnight money interest rates shot up this week because cash was scarce. In other words, the price of money rose because it was in short supply.
As of late today, it appeared that the huge injections of funds in the US, Europe and beyond had had the effect of pushing those overnight rates back down again, relieving the pressure on the banking system, for now at least.
[guardian emphasis added]
With the price of money rising, no doubt consumer banks will pass those rising cost onto consumers. Yet King remains silent, even though the FTSE’s crumbling.
Will or will not his actions prove beneficial to UK consumers is the 64 billion dollar question du jour.
The Inflation Question
April 23, 2007 at 3:59 pm | In bank of england, economy, gordon brown, interest rate | 2 CommentsLast week, the Bank of England announced record inflation rates prompting Mervin King, the central bank’s governor to write a letter to UK chancellor Gordon Brown, explaining why consumer inflation had reached a level that was more that 1 percent higher than the recommended 2% inflation rate.
The letter did not explain why the 2% rate was chosen as safe inflation, since inflation at any rate is , well, still inflation. The question: why at 2% inflation is “good”, but at 3% inflation is “bad” intrigued my mind. I couldn’t get any answers in the FT, Wall Street Journal, or any other financial broadsheet, so I decided to do further investigation into the inflation question to see if I could come across some explanation, forcing me to re-read “The Force of Finance”
Krugman’s occasional recommendation of 2 percent inflation means that money would loose half its value within 35 years – one generation. Why is that good?
asks Brenner
Indeed, in some of his writings for Slate magazine and others, Krugman appears to admit that inflation targeting as a solution/strategy for economic advancement may be fundamentaly flawed, since, by the professors own admission:
The Consumer Price Index overstates inflation. Nobody really knows by how much, but Boskin and company made a guesstimate of 1.1 percent annually. Compounded over decades, this is a huge error.
In Mervin King’s letter to the Chancellor last week, he blamed the record CPI on “a sharp increase in energy prices during the second half of last year” which he feels ” more than offset the fall in petrol prices”. King also blames the record inflation rate on a rise in food prices caused by “bad weather”. This – King states – accounts for one half of the CPI pick up over the past year, which has risen to 3.1% from 1.8% this time last year. King points to this “upside” in inflation, which forced the bank to raise interest rates by 75 basis points over the past couple of months. Most economists are predicting imminent rate rises in light of the inflation figures and to a lesser degree, the strong pound against the dollar.
Although Gordon Brown appears satisfied with this strategy, Kings argument for rate rises is not flawless, because if rising interest rates were the cure against rising inflation, then the interest rate rises in August last year and the “surprise” rate rise this past January should have curbed the inflation rate, but this has not happened.
Furthermore, King is blaming the rise in inflation on energy prices and the weather, all aspects of human life that he has absolutely no control over. So if King and the bank of England have no control over the causes of inflation, how can we realistically expect him to have the cure?
BoE – rates on hold "for now"
March 21, 2007 at 12:35 pm | In bank of england, economy, interest rate | Leave a CommentBank of England minutes released this morning showed one policy maker voted for a rate cut this month and none wanted a hike. “That’s quite surprising. As you know the general feeling has been that there is one more hike left in the pipeline yet,” said Richard Hunter, head of UK equities at Hargreaves Lansdown
[Reuters]
UK inflation at record levels
January 16, 2007 at 5:08 pm | In bank of england, ecb, economy, inflation, interest rate | Leave a Comment
The UK’s Consumer Price Index (CPI) rose to 3 per cent in December, up from 2.7 per cent in November and was the highest on record according to the National Statistics office. The Retail Price Index (RPI) also rose to 4.4 per cent in December, the highest since 1991. The two indices are used by government statisticians and economists as measures for inflation (or deflation) rates in the overall economy.
Rising mortgage costs had an “upward effect” on the RPI in December, mainly due to increasing interest payments; with lenders passing on the November 2006 quarter point increase in the Bank rate.
The BoE used the 2.7% CPI November figure as justification for their “shock’ rate rise last week. At 3% we should assume/prepare for another rate rise next month. This weekend, in the Sunday Times, economics editor David Smith wrote:
I dont want to scare anybody unduly, but the last time we had a retail price inflation beginning with a four … the bank lifted rates to 7.5%. Yes 7.5% …
In a speech today, Dr Andrew Sentance of the Bank of England described inflation in simple terms as: “too much money chasing too few goods”. Dr Sentance explained that in order to understand whether there is too much money, “we also need to understand the factors affecting the production of goods and services, and how changes in these supply factors are affecting the outlook for economic growth and inflation.”
Dr Sentance highlighted labour as one such “supply factor” affecting the economy and concluded that normal labour supply growth would add 0.3- 0.4% a year to the country’s GDP. However, minimum wage increased to £5.35 an hour last October, up from £3.70/hr in 2001 representing a 45% increase; more than four times the consumer prices index increase and more than double the rate of growth of average earnings for the same period. Sentance feels that this dramatic wage increase could have a “negative impact on employment prospects and add to wage pressures in some sectors of the economy, exerting some upward pressure on the level of structural unemployment.”
The chart above shows unemployment rising in the UK, which Sentance describes as “something of a puzzle”, citing “supply shocks” from increasing migration and increased participation of older workers as one probable explanation:
According to official estimates, net migration into the UK has risen fourfold since the mid-1990s, from around 50,000 a year to around 200,000 a year in 2004 and 2005. These figures have been boosted in particular by higher migration from the eight new members which joined the European Union in 2004, though the official figures suggest higher net migration goes back to the late 1990s. If sustained, this pattern of migration could contribute an addition of up to half a percentage point per annum to the growth of labour supply and hence employment. …
On the other hand, the recent surge in migration associated with the accession of new members to the European Union may ease off over the years ahead. Though the accession process is continuing, with Romania and Bulgaria joining this year, more EU countries are now opening their borders to migrant workers – providing alternative employment opportunities.
Indeed, today’s inflation report highlighted UK growth at a rate above the EU, citing the provisional inflation rate for the EU 25 in November at 2.1 per cent, compared with the UK rate of 2.7 per cent. The lower inflation will no doubt have an effect on cost of living which could be a great incentive for new EU members to migrate elsewhere. For example, Germany’s booming economy, coupled with low inflation and a diminishing labour market, in the short to medium term have greater pull than the UK’s over-inflating economy.
Dr Sentance concluded his speech by reminding us that the background to latest rate rise was primarily the rise in CPI. With December figures …
“significantly above its target level … if inflation is to be brought back to target and remain there, demand needs to be appropriately restrained and expectations of inflation by wage and price-setters must remain consistent with the 2% CPI target. As the press release accompanying last week’s interest rate move made clear, the MPC judged a further interest rate rise was needed to ensure that these conditions would be met and keep inflation on track to meet the target over the medium term.
Conclusion; brace yourself and hold your noses, expect another rate rise next month.
EU interest rates
January 11, 2007 at 3:03 pm | In UK, bank of england, economy, interest rate | Leave a CommentBoE raises 0.25 percent to 5.25%, but the ECB holds steady at 3.5%, causing the euro to once again strengthen against the dollar.
From the BoE press release:
In the United Kingdom, output continues to rise at a firm pace. Domestic demand has grown steadily and credit and broad money growth remain rapid. The international economy continues to grow strongly.
Sterling has risen and oil prices have fallen back. But the margin of spare capacity in the economy appears limited, adding to domestic pricing pressures. CPI inflation was 2.7% in November. It is likely that inflation will rise further above the target in the near term, but then fall back as energy and import price inflation abate. Relative to the November Inflation Report, the risks to inflation now appear more to the upside
Asking prices "at a standstill, no need for rate rise" claim Rightmove
September 18, 2006 at 4:52 am | In UK, bank of england, economy, ftse, housing market, interest rate, rightmove, stock market | Leave a CommentIn their latest survey to be released today, Rightmove plc said that the number of properties coming onto the UK residential market fell to their lowest since the start of the year, while stocks of properties on agents’ books also fell.
Normally, a dwindling supply of homes would herald a pick up in house prices if demand holds up. But Rightmove expects inflation to level off as recent house price gains conspire with higher borrowing costs to make it increasingly expensive for first-time buyers to get a foot on the property ladder.
“Asking prices are at a virtual standstill, the market appears to be correcting affordability issues itself and does not need further intervention from the Bank of England.” Rightmove director, Miles Shipside was quoted as saying.
In other Rightmove news; the company’s former director Grenville Turner is slated to head Countywide, the UK’s largest estate agency as it heads for a £900m stock market exit.
Abbey responds to the Bank of England’s decision to hold base rate at 4.75%
September 7, 2006 at 1:32 pm | In bank of england, economy, interest rate | Leave a CommentBarry Naisbitt, Chief Economist, Abbey:
“The Bank of England held rates at 4.75% today, probably reflecting a ‘wait and see’ approach following the increase last month. The Monetary Policy Committee members will probably want to evaluate the incoming economic news and assess whether the change made last month has had any impact on economic activity and inflation expectations. The economic news over the past month has not been sufficiently dramatic to alter the markets’ expectations of a further base rate rise, however.
“The market focus is on November when the next Inflation Report will be published. Given the decision last month, there will be the usual speculation on whether any of the Monetary Policy Committee members voted to raise rates. Given the medium-term inflation projection presented last month, I suspect that the decision to hold rates today may not have been unanimous – but we’ll have to wait for the publication of the Minutes to find out the details.”
For further information please contact:
David Stewart
Tel: 0207 756 4199
Email: David.Stewart@abbey.com
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