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Northern Rock Panic

staticgirl

Abominable Snowman
Joined
Oct 12, 2003
Messages
989
Is it just me or is the Northern Rock Panic rather Weird? If it had been about disappearing penii or phantom smells it would have been in the FT quicker than you can say "Charles Fort".

The large majority of NR savers seem to be totally ignoring the protestations of the authorities. The conspiracy mindset seems to be in full effect.

For those who haven't seen the UK news, NR got a loan from the Bank of England because its usual creditors were holding on to their money given the queasy American market. It's still solvent and was not in trouble (and never was according to the BoE, the government etc), the government has guaranteed savings in an attempt to calm the panic and yet savers are convinced the bank is close to collapse. People are queuing up in their thousands at branches, the website is not working properly under the load and billions have been withdrawn by savers.

What do you think?

http://www.inthenews.co.uk/news/finance/northern-rock-panic-continues-$1134307.htm
 
Definitely the conspiracy mindset is in full flow. Some people didn't start taking their money out until the government said that they wouldn't lose it, as that's when they "knew" there was something wrong.

I wonder if anyone was panicked enough to pay off their overdrafts...
 
My parents have banked with Northern Rock for years and had their life savings with the bank. After the Bank of England loan was announced last week, they called me for advice and I suggested they withdraw any funds they held above the UK insured limit (GBP32,000). In my view this was sensible advice, but it is one of those cases where what is good for the individual is potentially bad for a wider group.

What I do find odd is that people are continuing to withdraw money now when the government has guaranteed the deposits. If anything this guarantee makes NR safer than the other banks out there.

The media hasn't helped - the BBC this morning showed queues of people outside a North London branch of the bank and the presenter was visibly irritated that similar queues had not also formed in Newcastle, as it was making the story less dramatic.
 
Timble2 said:
Some people didn't start taking their money out until the government said that they wouldn't lose it, as that's when they "knew" there was something wrong.
Well, quite - if Alistair Darling gave me a vote of confidence, I'd be off down to the doctor for a check-up ASAP.

If you do trust the government's word, though, now is an excellent time to buy shares in Northern Rock!

It's a bizarre case, this, isn't it? I'm sure I've heard of banks having to take out short-term loans with the Bank Of England before - it's a fairly well established way of covering temporary liquidity (as opposed to solvency) problams. So why the utter panic now? Should we blame the meejah for stoking the flames of unrest?

Of course, while it's easy to paint the first "panic withdrawers" as fools with little or no understanding of matters financial, it's hard to actually blame them when the story has been hyped up so much. Moreover, let's assume you are a Northern Rock investor who has resisted joining the first flock of sheep in queueing at your local branch, sensibly reasoning that NR are a solid, stable company. But then, when you hear that £2billion has been withdrawn from other people's accounts in the last couple of days, making the situation a lot worse, what do you do? Do you take the moral high ground, waiting for things to calm down, or do you convince yourself that you were thinking about moving your account to Abbeyfax anyway, so why not today, and join the queue?

It's a bit like panic buying when there's some natural disaster. You can tut-tut all you like when the first wave of lemmings goes in to buy a year's worth of bread or bottled water, when you know there's no real shortages, but in the meantime, they're clearing the shelves and if you don't join them soon, there'll be nothing left for you, so you get down to the supermarket while there's still something left, and get yourself a little extra, because you don't know when you might be able to shop again.
 
It's a bizarre case, this, isn't it? I'm sure I've heard of banks having to take out short-term loans with the Bank Of England before - it's a fairly well established way of covering temporary liquidity (as opposed to solvency) problams.

This is the first time the Bank of England has made a loan of this nature since the early 70s. So it is a fairly unusual occurrence.
 
Really? I'm surprised - maybe I'm just thinking of regular bank-to-bank lending. I perhaps assumed the the BoE was involved in that abit more often than you say is the case. Or maybe I'm older than I care to imagine.
 
Well, NR's share price has gone up, so it seems the panic is not spreading to the markets.
 
I think it underlines a general lack of trust in the present government. I think the government could pull its sleeves up and show empty palms and promise on its mother's life but where it comes to being potentially hit where it hurts - their own pockets - people tend to be wary.

To be honest, I don't blame them - the government aren't exactly well known for being honest when it comes to how much something is going to cost someone else if it all goes tits up.
 
Well, NR's share price has gone up, so it seems the panic is not spreading to the markets.

Er, I think the panic spread to the markets a good while ago. The slight increase in share price today comes against a 40% slide yesterday.
 
I was talking WRT the panic over NR, not the wider market stability issues.
 
I was talking WRT the panic over NR, not the wider market stability issues.

So was I.

Northern Rock shares have more than halved in value over the last week or so and have in fact been falling all year - from a high of £12 a share to £3 today. The fact that they have bounced back a tiny amount since the Government announced a blank cheque for savers is hardly evidence that the "market isn't panicking".
 
The fact that their share price has gone up shows that the market isn't panicking. If there's an incremental rise in the share value over time, NR fortunes can recover. A panic would mean wholesale dumping of NR shares before a collapse of the bank as a whole.
 
I think this is a bit Pollyanna-esque even for you JerryB ;)

There hasn't been a run on a bank like this for decades. It's very, very hard to imagine NR surviving as an independent entity. The images of people queuing round the block to withdraw money will take a lot of forgetting.
 
...and after a sharp fall in the last week the shares are shooting up now. I personally know several people who bought shares in the company yesterday with this in mind. I will never understand finance....
 
I don't know much about finance, but I did occur to me that if I actually had any money yesterday would've been a good day to buy NR shares, especially if someone's waiting to snap it up...Which is now likely to happen.

BTW did anyone else think some of the newspaper coverage today was intended to create panic...
 
An interesting technical insight into the IT angle here:

When online bank sites fail
Tom Ilube
Chief executive, Garlik

When I heard the news that crisis-hit Northern Rock's website had crashed last Friday under the weight of numbers of online savers trying to withdraw their money, I immediately thought, "Thank goodness I am not the IT director of Northern Rock today."

Having served as the head of technology (chief information officer) of Egg plc, one of the world's largest online banks for several years, I know exactly how these things work.

I can imagine banking IT directors up and down the country looking at each other nervously thinking, "There but for the grace of God..."

Banks like Northern Rock spend millions of pounds a year on their internet banking systems.

They will have big, air-conditioned rooms filled with dozens of heavyweight computers, called "servers", to do the hard work and several hundred expert IT staff to look after them.

These are big, well-funded, well-supported technology operations, not two guys eating pizza with their feet on the desk.

So one wonders why sites like this crash at all.

Well, I can say from experience that building computer systems that can cope suddenly with a completely unexpected burst of perhaps 10 or 20 times their normal processing volume is notoriously difficult to do, but by no means impossible.

Main approaches

Firstly, a bank such as Northern Rock can make sure it has enough computer servers on standby, ready to swing in to action if the need arises.

This can be very expensive, because for 99.9% of the time, the bank will have large numbers of computers sitting around doing nothing.

However, a bank can make an arrangement with a huge IT company to provide the extra capacity "on demand", ie only when it's needed.

The bank pays something to have this capacity on standby, but not the full cost, rather like an insurance policy.

Secondly, a bank can put in a throttle of some sort to slow down the number of customers hitting the system second by second.

The website will get slower and slower but will not crash suddenly in a messy heap.

Typically, when it gets unbearably slow, customers are automatically diverted to another temporary website which will take their contact details, perhaps their instructions, and get back to them as soon as possible.

Extreme occasions

Thirdly, a bank can choose to ignore the issue - and if a spike of customers actually occurs, it will allow the system to fail abruptly and sort it out quickly afterwards.

There are sound economic reasons for taking this third approach as major spikes happen rarely, if ever.

If it does happen, the damage to their reputation can be immense, but they are betting that consumers have short memories and they will ride it out.

However, some banks are focused on efficient operation and cost control above all else.

They may take the view that the risk to their reputation is outweighed by the financial benefit of saving money by not putting in place contingency plans for these rare and more extreme occasions.

Luddite executives

One of the root problems in many banks is that the business people who run the bank do not understand computers.

Some senior banking executive even take a Luddite pride in knowing nothing about computers.

There are bankers in the UK today who even get their secretary to print out all their e-mails and put them in a folder every morning! :shock:

But in the age of the internet, that is completely unacceptable. It's like bankers boasting about how little they know about accounting.

Meanwhile, the IT chaps don't know how to explain what they do or, more importantly, what risks are being taken as a result of the IT decisions being made.

But actually, the question to be asked is simple.

Every bank chief executive should ask their IT director today, "if we are hit by 10 times our normal customer volume tomorrow, what will happen to our online banking system?"

If you look outside the banking sector, there are businesses that deal with this challenge extremely well.

I recall talking to the IT executives at a major news media broadcasting organisation about how they handle unexpected peaks of traffic.

Online news media, TV and radio companies are great at designing systems specifically to cope with massive spikes.

After all, when there is a huge, breaking news story, that is precisely the time that online performance has to be at its best.

In fact, it would be interesting to contrast the performance of the big news sites last Friday that were reporting the Northern Rock news with the performance of the Northern Rock site itself.

The banking sector can learn a lot from the online news media industry.


Panic

On a day like last Friday, the scene in the IT department at Northern Rock would have been manic.

The bank will have systems that monitor the main online banking system to alert people if there is a problem.

There were probably big screens showing exactly what was happening, second by second, like a mission control centre.

That's where the IT director would have been, pacing up and down, watching developments.

The alarm bells would have started ringing long before the website crashed.

The core team members would be at their desks.

Every supplier company would have key staff in the building or on standby.

New computer servers would have been built and installed as quickly as the guys could do it.

It's a race against time to beef up capacity, but unfortunately on this occasion, the customer volumes grew just too quickly - and horror of horrors, the site crashed.

That's when the IT director picks up the phone to his chief executive to make that call.

Ouch!

Lessons

We've all been there at some stage, whether it was Egg's online systems being overwhelmed by its successful product launches years ago, the government's census data site crashing within hours of launch and being out of action for months, or Northern Rock's current challenges.

One thing you can be sure of, though - you learn fast in a crisis.

That Northern Rock IT director is the only IT executive in the UK online bank world today who has been at the sharp end of a digital run on the bank.

That direct experience is invaluable - and whatever happens to the rest of Northern Rock's executives, he will be in high demand to share his experience across the finance sector and make the whole online banking world safer.


http://news.bbc.co.uk/1/hi/business/7000203.stm
 
I went to a couple of the Northern Rock branches to take photos yesterday (I am the evil media) and it was a really strange atmosphere. At the Golders Green (North London) branch it was mostly pensioners, the bank had provided chairs and the staff were handing out sweets to those in the queue. Everyone looked very relaxed like they were queing for a sale rather than trying to withdraw their life savings! I wonder if they all feel a bit silly now for wasting hours and hours queing when they didnt need to?
 
Moocowthegreat said:
I wonder if they all feel a bit silly now for wasting hours and hours queing when they didnt need to?

They're pensioners, for goodness sake - it's what they do!
 
I don't understand why Northern Rock is being so accommodating with those who are clamouring to withdraw their money - if I was in charge, I'd make the buggers outside each bank all queue at the same till (Chocolates? Pah!) :twisted:
 
There's a brief explanation of the LIBOR (London Interbank Offered Rate) over at the British Banker's Associationsite. It also has a list of LIBOR historic rates so you can compare the last couple of weeks with previous levels.

What I know about this is based on a Working Lunch piece from last week, but it seems that, since the backside fell out of the US sub-prime lending market, there have been issues regarding the rate at which banks make short term loans to each other. Apparently it's quite common for banks to lend money to each other overnight. Maybe someone with more financial nous could correct the above if I've picked up any of that wrong.

Taking money out of banks that seem to be doing badly is fairly well documented. I expect some of the older folk might have known people who remembered thecrash of 1929- a lot of people (especially in the US) lost all of their savings when banks went under. The problem is that, once some people start taking their money out, the bank does even more badly, so people get into a panic and want to get their money out before the whole thing falls over. It then goes into rapid positive feedback and the institution can collapse fairly quickly. That's why the govt needed to step in- because once one goes, others tend to follow. Then your whole banking sector is away up shit creek, and the rest of the economy follows after.

Which is fine if you're a primitivist living in the wilds and awaiting the collapse of civilisation.
 
Being as I have absolutely no personal concern in Northern Rock, I have decided to see the funny side in this guy's name.....

rynner said:
An interesting technical insight into the IT angle here:

When online bank sites fail
Tom Ilube
Chief executive, Garlik

When I heard the news that crisis-hit Northern Rock's website had crashed last Friday under the weight of numbers of online savers trying to withdraw their money...............
...............and whatever happens to the rest of Northern Rock's executives, he will be in high demand to share his experience across the finance sector and make the whole online banking world safer.[/b]

http://news.bbc.co.uk/1/hi/business/7000203.stm

Sorry, I'm infantile, I know.
 
A run on the bank is a known phenomena rather than something fortean, once it starts its difficult to stop and it will collapse the bank which is in no ones interest. It becomes a self fufilling thing. Once the first group of people are queueing to get their money out everyone is rushing to do it.

As I understand it the Bank of England has no choice but to guarantee the deposits otherwise any bank can fail and there is no such thing as a British banking system if that can happen. Its called "lender of last resort" and is one of the Bank of England's main roles. The same in other countries.

If northern rock collapses all the other banks will be in danger of collapse so the Bank of England has no choice but to bail it out. 90% or not it isn't going to let the bank fail. Its called "confidence in the banking system". Depositing funds in one of the main UK banks has to be fairly safe otherwise no one would do any business with Britain.

Probably wikipedia explains it better than me. Or the bank of England website.


http://en.wikipedia.org/wiki/Lender_of_last_resort

http://en.wikipedia.org/wiki/Bank_of_England

http://www.bankofengland.co.uk/



Okay no one's interested are they? (and I don't blame them)
 
Rock crisis hits young investors

A shares club at a Cornish school has lost more than £250 following the collapse of Northern Rock shares.
Liskeard School and Community College invested £500 in the bank a month ago when shares had dropped to £2 each.

They were hoping they would bounce back, but instead they have dropped to less than £1.

The school's shares club invests £1,500 which was given to it by city investors five years ago as part of the national Shares 4 Schools competition.

Business studies teacher Peter Pascoe said it had been a hard lesson for the children who have ended every year in profit and who were regional winners of the competition in 2005.

It is now bottom of a league of 85 schools in the competition run by the Shares Centre.

The 26 business studies students in the shares club now have until July to recoup their loss.

Mr Pascoe said: "Every school must have £1,500 to start the competition every year, so we might be holding a car boot sale."

The club also has shares in South West Water and Barclays, which are holding up.

'Dead cat'

Mr Pascoe said: "Every year up until now we have been in profit with a conservative and growth-based approach.

"We invested in mining firms and public utilities and made £300 last year.

"This year we decided to be more enterprising and decided to have a more risky strategy.

"We went for three firms with strong takeover rumours."

The club invested in Northern Rock, hoping for a "dead cat bounce", when shares recover from what is thought to be their lowest point.

But the shares carried on falling in value. :shock:

"It is very unlikely we shall see any profit," said Mr Pascoe.

"We have never been in this position before. But it has reminded pupils that shares can go down as well as up.

"They almost thought it was automatic that you made a profit, but they have had a good lesson in how the global economy works."

http://news.bbc.co.uk/1/hi/england/cornwall/7105384.stm

Yep, that's education, alright! 8)
 
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