Here is the story that you aren’t hearing about on the news that is the precursor to what might happen to many more banks in the very near future. Don’t believe the lies, if it starts….they can’t stop it.
LONDON (MarketWatch) — When money and debt markets seized up in August, the European Central Bank, the U.S. Federal Reserve and even the Bank of Japan rushed in to provide billions of dollars emergency funding to banks, in a bid to stem turmoil and restore functionality to the market.
The Bank of England, on the other hand, injected zero.
Mervyn King, the central bank’s governor, explained the central bank’s lack of action last week.
Chart of UK:NRK
“The provision of such liquidity support undermines the efficient pricing of risk by providing ex post insurance for risky behavior,” he said in prepared remarks to a government committee. “That encourages excessive risk-taking, and sows the seeds of a future financial crisis.”
Those words are now coming back to haunt King as the country’s fifth-largest mortgage lender, Northern Rock (UK:NRK: news, chart, profile) , has sought out emergency funding from the central bank, prompting a bank run as depositors rush to withdraw their assets.
Sterling has dropped sharply vs. rivals — admittedly from strong levels — and overnight lending rates have zoomed higher.
For sure, Northern Rock isn’t the only bank in the world to have run into difficulties. State-backed lenders in Germany have required bailouts, and in the U.S. several subprime lenders have folded.
Worries about “moral hazard” have been sounded around the globe. Further, central bankers worldwide fear that inflation could prove troublesome even as official numbers appear to indicate that prices are under control.
And the Bank of England doesn’t even have regulatory oversight of U.K. banks, that role being filled by the Financial Services Authority.
Still, the fact is, Britain is the first country to have a bank run from the current market turbulence, with Northern Rock customers lined up around the block, phone lines jammed and its Internet site under constant use.
And according to European Central Bank statistics, the euro-zone affiliates of U.K. banks have sought out funding from the ECB.
Politicians weren’t happy.
“It seems very odd that Mervyn King was saying there would be no bail-out, then he sets out how to do a bail-out and then he does the bail-out. We need to understand much more clearly how the decision was taken,” said Michael Fallon, a Tory MP.
In the governing Labour Party, George Mudie also wasn’t impressed. “I’m wondering where it leaves Mervyn King in terms of credibility,” he said.
In the City, however, observers were willing to give the central bank some slack.
“It’s not for me to criticize when knowing probably less than half the story,” said David Buik, a strategist at City Index.
Brian Hilliard, a London-based economist at Societe Generale, agreed.
‘The market may be asking, ‘Who led the discussion to create the (Northern Rock) support facility?’. We’ll never know.’
— Brian Hilliard, Societe Generale
“The market may be asking, ‘Who led the discussion to create the (Northern Rock) support facility?'” said Hilliard. “We’ll never know.”
Both the Treasury and the Financial Services Authority were involved in making the decision to extend funding to Northern Rock.
Andrew McLaughlin, an economist at the Royal Bank of Scotland, also wasn’t willing to declare that the central bank had made a u-turn. “It has already had to act to support one bank facing liquidity difficulties, although these arose largely from the particular business model the bank has adopted, and do not apply to the U.K. banking system as a whole.”
Michael Saunders, an economist at Citigroup, said the central bank will be more stingy toward other mortgage lenders which don’t have retail deposits at risk.
“The likelihood that the Treasury/FSA/BoE will lead a rescue operation if any of these non-bank lenders face solvency problems is not so great,” he said.
The market already was expecting a rate cut from the Bank of England next year as the accumulated impact of four rate hikes puts a dent in housing market. Recent surveys from the Royal Institute of Chartered Surveys and Rightmove have at last suggested the housing market in the U.K. is beginning to turn.
“That’s been the signal the market’s been waiting for that the central bank would not tighten any further,” Hilliard said.