Northern Rock very likely now NOT to go bust


after government steps in...

In a previous post I said...

The problem that Northern Rock face is a lack of confidence in them by the public.

Despite the protestations of the bank, the media, the Chancellor, there were long queues outside many branches of Northern Rock today.

And it is this lack of confidence that will kill Northern Rock, not the loss in liquidity that caused them to ask the Bank of England for an "overdraft" facility.

I then at the end said...

Big question is will this affect the rest of the (fragile) banking system in the UK?

This was obviously the reason that the Chancellor stepped in and guaranteed all deposits in Northern Rock.

It was soon apparent that the "panic" was starting to spread to other banks, with queues forming outside branches of the Abbey and some other banks.

If panic spreads to more banks then that could potentially just cascade across the whole banking sector and the economy would grind to a halt, think about how little you use cash and how much of your income is "spent" via debit cards, cheques, direct debits, standing orders, etc...

The government had no real choice, with the panic about Northern Rock spreading to other institutions they had to step in. Unlike with Barings or BCCI, Northern Rock being so large if it had gone under it would have dragged a few other banks with them as the panic about banks in general spread.

At the time of writing the share price hasn't really recovered which shows that investors have no confidence in the bank.

Be interesting to see what happens next.

Posted: Wed - September 19, 2007 at 06:38 PM         | |

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