It might only be 4% of GDP, but it serves a vital role in ensuring the efficient flow of money around all of our economy to finance everything from big business to our corner shops to our mortgages. We simply cannot afford to allow a run on a major bank like Northern Rock happen again because the banking sector is too important to us all and is just too much like dancing with danger for my taste.
The high street banks and building societies play a huge role in the economy and it is vitally important that every step is taken to maintain the public’s confidence that their deposits are safe.
Thus the actions (and inactions) of the past few weeks over Northern Rock has come as an unpleasant surprise to us all, including, no doubt, the powers that be. It is therefore essential that we put politics aside and take steps so that we do not see queues of anxious depositors forming outside a high street bank again.
As an aside, it was interesting to note that many of those queuing outside Northern Rock seemed to be older citizens.
You might put forward several reasons for this, but I would argue that there older citizens were the sensible ones who were aware that their savings were at real risk, whereas perhaps the younger savers, who have been brought up in more comfortable times, were more complacent. The run on Northern Rock is a timely reminder to us all that banks can - and do - go bust, taking depositors’ savings with them.
However, my concern is that we have been courting at least financial embarrassment, if not actual failures, by our lack of concern over the credit storm that had been brewing. We were impervious to the worries of the wider risks to the very fabric of our modern lives that a loss of confidence in a banking system might bring.
A tripartite blame game seems to have been carried out between the Bank of England, the FSA and the Treasury. All point the finger at the other, apparently unable to fully manage the situation as their responsibility didn’t “extend that far” – or not as far as they might want. The result being that this most vital national industry was being internationally embarrassed with pictures of a run on the bank worthy of a banana republic – and not one of the world’s leading international finance and banking centres. Not to mention the stress and worry caused to the poor depositors at the Northern Rock who may have spent sleepless hours trying to call “help desks” before standing for hours outside their local branch.
The regulators appear to have been sitting on the sidelines as events occurred and only reacted once potential problems became actual crises - perhaps the worst banking crisis since the Overend and Gurney bank failure in 1866. We knew about the credit squeeze before the queues formed, but the banking regulators apparently decided to do nothing about it until they were forced to by the good depositors at Northern Rock who correctly realised that their lifelong savings were at risk.
I totally share Mervyn King’s and the FSA’s frustration, and the hidden hand of the Treasury needs now be seen to be taking clear action to ensure that lines of responsibility are cleared and firm leadership taken. Dancing to danger with this industry could have far wider economic implications that just the run on the “Rock”.
The comment from one American banking friend struck home “Justin your banking regulation seems just like your railways – somewhat dysfunctional and usually late”. Oh dear. Fair, but a little harsh, if you have ever caught a train from Boston to Washington DC.
So could the run on the Northern Rock have been prevented by a broader US style deposit insurance scheme, where the US Government guarantees the first $100,000 of all deposits? The fact that the run ended once all deposits were guaranteed by the Gordon Brown suggests that the answer is an emphatic “yes” and points to the need for a clearer and more transparent bank deposit scheme than the woolly one we have in place today.
We need to learn from the Northern Rock episode, put the finger pointing and politics to one side, and establish a more robust system of regulation. The impact of a systematic failure of the banking system is unimaginable and the present system is just too much like dancing with danger.
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And finally…….news of a dramatic rescue in a Hampshire old people’s home where firemen rescued residents after the alarm went off. Cause? Some pensioners were warming their slippers under the grill. That is where I left them.
Have a good week
Justin A. Urquhart Stewart
Director
Seven Investment Management
Investment bankers – all the backbone of the terracotta army – broken, cracked and buried. May have been around a long time but haven’t achieved much!