Stuck between a Northern Rock and a hard place

28 September 2007

They say a week is a long time in politics. A fortnight in the financial industry feels like a lifetime. The much-publicised events at Northern Rock have left the market in a state of shock.

Since the Bank of England provided liquidity support for the mortgage lender on September 14th, the financial industry has been on a roller-coaster ride which involved mass withdrawals, calls for the head of the Bank of England and hundreds of millions of pounds wiped off the values of many banks on the stock markets.

Now that the dust is seemingly settling on the tumultuous events, customers are finding themselves trapped in a state of confusion. Worried savers withdrew over £2 billion from Northern Rock over five days and now do not know what to do. Northern Rock is attempting to win back its customers, while many are unsure whether to trust the banking system at all.

Jim Spowart, chairman of financial advisor People`s Champion, suggested that trust in the British banking system has gone, especially with older customers.

"Many people, especially older people, are being much more cautious with their money. They have been bitten first by the pension crisis, now Northern Rock, so instead of going instinctively for the highest return, they are looking more at safer havens where they know their money is secure.

"We were able to ask one question: `What do you intend to do with your money now?` The one clear answer from the majority of people we talked to was that consumers are looking for safety, rather than the best interest rates."

Northern Rock`s share price dropped by 35 per cent and queues formed outside many of its branches. The situation got so bad that the chancellor of the exchequer, Alistair Darling, was forced to guarantee the savings of customers of Northern Rock and all other banks in the country, a move valued at tens of billions of pounds.

Since then, share prices have leveled and takeover talks for Northern Rock have been mooted. Customers have been looking for someone to blame. The Bank of England`s governor, Mervyn King, was singled out for not taking action when he knew of an impending crisis a month earlier.

However, the British Bankers` Association chief executive Angela Knight has praised Mr King for dealing with the aftermath of the situation.

Ms King said: "The Bank`s willingness to lend for longer maturities than just overnight, against a wider range of collateral, should considerably ease the very tight conditions that we have been seeing in the money market over recent weeks."

Northern Rock has, not surprisingly, taken a share of the blame.
Jenny Challenor, mortgage strategist at Torquil Clark, said: "Northern Rock sailed too close to the wind with their desire to make profit. They took the gamble and it backfired and this behaviour by a British bank is not acceptable. Northern Rock relied too heavily on short-term loans to fund its mortgage business. Now taxpayers` money is being promised to clear up the mess."

In the middle of the blame game, customers are still confused. Not knowing what to do with their money, or if a similar situation could occur again, many are now wary of banks, where once they held trust.

Research by high street bank Abbey found that many savers are thinking of switching accounts to find the safest place for their money. Abbey discovered that over £57 billion worth of savings could be switched.

Reza Attar-Zadeh, director of savings and investments at Abbey, said: "This is a great time for savings and we are seeing interest from new savers at unprecedented levels. We would urge savers to take advantage of these excellent rates while they last."

So, customers could benefit from the mayhem. High street banks are competing to gain disillusioned Northern Rock savers with better-than-ever rates. Short-term joy, however, will be tempered by the knowledge that it could, possibly, happen all over again.

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