The current situation with Northern Rock shows just how important customer confidence is when you are (as are virtually all banks) profiting from the borrow short / lend long play. Without deposit insurance (which, I should add I oppose) panics can develop without logical foundation
As their most recent balance sheet makes plain they are entirely solvent – but cannot realise their mortgages fast enough to meet highly abnormal demands for repayment of deposits. This will may mean that the B of E will have to arrange a sale to the highest bidder – and the rumours I have heard is that a few institutions are looking at it, including the National Australia Bank, which has been looking around for further acquisitions in the UK.
The NAB would be a good purchaser, with, in contrast to the Rock, a good deposit base and no real reliance on wholesale funds – the reliance that triggered all this off for Northern Rock.
The lesson here? Watch that name risk and make sure that any announcement of problems is phrased correctly. Having the Bank of England make an announcement that it was moving in as lender of last resort, as Northern Rock did, probably does not set the right tone.
Have your plan up to date and ready to go at all times – take it off the top shelf, blow off the dust and review it now. You never know when you are going to need it.
17 September, 2007 at 22:41
How does this compare with this article
How do one find out which banks in australia hae less reliance on wholesale funds?
Secondly, now the australian banks are starting to do what the american banks have done, http://www.smh.com.au/news/business/banks-test-water-in-bonds/2007/09/13/1189276900222.html
How do one find a safe bank in australia?
Looking forward to reply,
18 September, 2007 at 01:53
There have been very long arguments about the use of fiat currency from a political / philosophical and economic point of view. Dan Denning has a particular point of view as regards using fiat currency as opposed to one backed by some commodity or commodities.
There are several points in Dan’s article I disagree with and, to be blunt, I believe he is using the current problems to push an ideological barrow, without actually looking carefully to see if it is right in this situation. Longer term he may or may not be right, but changing the entire currency system in Australia to meet this challenge is a very big hammer to crack what is a very small nut.
For less reliance on wholesale funds the job is fairly easy – compare the deposit base to the amount of loans outstanding. For Westpac, for example, from the 2006 annual report, their deposits were 168bn and loans of $234bn. For Northern Rock the ratio was GBP26.7 to GBP86.7 – a much higher reliance.
If you want to look at this metric it is a fairly easy one to do for your chosen institution.
I should add that I do not believe that Northern Rock is unsafe – just that their normal funding source has dried up. Given these problems, though, I would think that any fresh lending to it may be at penal rates, meaning that its future as an independent financial institution may be short. Banks rely on their names and a loss of confidence is normally devastating to their long term future.
The SMH article confirms that liquidity is starting to return to the market now that the probability is that the fallout from the problems in the US has been identified and contained.
These things happen from time to time. We are in a good position to weather it and I very much doubt that any Australian institution will be severely affected by this.