ALEX BRUMMER: Run on Northern Rock now ten years ago

On Northumberland Avenue in the centre of Newcastle the only trace of the city’s once proud bank Northern Rock is the historic clock above the brightly red clad Virgin Money branch.

Ten years ago this week, on September 14, the Northern Rock branch in the heart of Newcastle and those up and down the country were besieged by anxious savers wanting back their money as Britain experienced its first bank run in a 140 years.

The run on the Rock was the canary in the mine for the great financial crisis which would follow a year later although incredibly regulators and financial experts did not recognise its significance.

In crisis: The sight of savers desperate to get their money out of Northern Rock was a signal moment for Gordon Brown¿s government

In crisis: The sight of savers desperate to get their money out of Northern Rock was a signal moment for Gordon Brown’s government

Indeed it is instructive to remember that the disastrous Royal Bank of Scotland takeover of the Dutch bank ABN Amro didn’t complete until after the Rock had been bailed out in September 2007.

The sight of savers desperate to get their money out of Northern Rock was a signal moment for Gordon Brown’s government. It was the event which shattered Labour’s reputation for economic competence and led one business leader to comment that it made the UK, the fifth richest nation in the world, look like a ‘third world country’.

Northern Rock had been riding for a fall for years. The creation of the 125 per cent mortgage by the bank’s boss Adam Applegarth was evidence of how far it had travelled from the cautious lending when it was just a building society. Even worse, Applegarth had exposed the bank to volatile financial markets by packaging up the mortgages of ordinary British home owners, carting them off to New York where the ‘casino banks’ would sell them as securities.

The catastrophe at Northern Rock exposed some deep flaws in the way that London, the world’s largest banking centre, was supervised. The bank’s board, chaired by the gifted Matt Ridley, was unable to restrain Applegarth’s ego and ambition.

THE regulator, the Financial Services Authority (FSA), was incompetent, and the Bank of England initially indifferent. It was governor Mervyn King’s first experience of a bank run and his initial reaction was to play hardball with the Rock by refusing long-term assistance on the grounds that it would create ‘moral hazard’, encouraging other badly run banks to believe that rash lending would not be punished.

As an unseen crisis in the money markets unfolded, with banks refusing to lend to each other, King came round to the view that the Rock would have to be rescued and Britain might eventually have to inject fresh capital into many UK banks.

For years banks had wallowed in excessive credit and experimented with ever-more complex financial instruments which were little understood. Indeed, even as late as the summer of 2008, when the US investment bank Lehman Brothers ran into trouble, UK regulators and supervisors believed that the failure of the Rock was a one off, the holes in the financial system could be plugged on a case by case basis and the City could withstand the tsunami.

How wrong they were. The problems of Northern Rock were those of the whole financial community, and when the crisis came back with huge ferocity a year later, RBS and HBOS teetered on the brink. A chasm was to open up in the public finances and British households would face a decade of flat or falling incomes.

Alex Brummer’s short film on the collapse of Northern Rock is scheduled to be shown on BBC2 Newsnight at 10.30pm on Monday

Courtesy: Daily Mail Online

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