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A Bank Run in England
By Jon Menaster | September 17, 2007
The Northern Rock bank in England has an uncertain (to say the least) future on the horizon. As reported by multiple news outlets, bank customers have been waiting in excess of two hours to withdraw savings from the bank. As one of the articles explained:
Northern Rock is Britain’s fifth biggest mortgage lender, but customers on both sides of the Irish Sea began to withdraw savings en masse after the Bank of England bailed out the bank. The level of withdrawals was high, with a reported £1 billion taken out.
The bank has been promised money by the Bank of England, but that still did not help calm nervous customers. The reason behind all of the mess? Yes, you guessed it, the collapse of the subprime mortgage market in the United States. Somehow, someway, the subprime debacle still manages to unsettle financial markets worldwide. In this case, the bank was unable to raise sufficient cash to cover all its positions after the credit market was tightened due to the subprimes.
Northern Rock relied on capital markets over customer deposits more than most banks for its financing, and that policy decision came back to bite the bank. (in a big way. ouch.)Estimates are running between 3 and 4 billion with a B dollars having been withdrawn from the bank within the past week alone. Not only that, but shares in Northern Rock’s stock dropped 40% and then spread fear over to other banks like Llyod’s of London.
The lessons I would draw from reading about this would be: never trust any one bank to “do the right thing”. Spread your cash across multiple institutions and therefore protect yourself from the failure of any one bank or agency. In the United States, your deposits are FDIC insured only up to $100,000. Beyond that and you should split the amount up anyway just for your own protection. (Think it can’t happen here… you’re wr-o-ng)
** UPDATE: Now, even the New York Times has run a story on the impending demise of the bank. Now that the mainstream media has picked up the story, just watch everyone scramble to their computers to look up what they just read through the Times or heard on T.V. I just wish sometimes it would be the other way around.
Topics: Business, Finance, Investing, Money News, Savings |