大象传媒

Rock or crock?

• Robert Peston
• 14 Sep 07, 12:41 AM

The good news is that the , the and the don't believe is an unviable business.

If they thought the Rock 鈥� or Northern Crock as it鈥檚 been dubbed in the markets 鈥� was an intrinisically bad bank, they would not have agreed to rescue it by providing emergency funding.

Such the was unambiguous implication of the Bank Governor鈥檚 statement to the on Wednesday on the circumstances in which the Bank is prepared to act as lender of last resort to a troubled institution.

But that鈥檚 the end of the good news.

What also said is that the Bank will only provide funds to a troubled institution in this way if the risk of a collapse could lead to 鈥渟erious economic damage鈥�.

Certainly Northern Rock 鈥� with 拢24bn of retail depositors鈥� funds and 拢113bn of loans and other assets on its books 鈥� is big enough to wreak a fair amount of havoc, were it to fall over.

Anyway, none of us 鈥� not even Northern Rock鈥檚 depositors 鈥� probably need to panic that the Bank has had to step in.

But does that mean that Northern鈥檚 customers and shareholders have no reason to feel aggrieved at Northern鈥檚 management?

Is it anyone鈥檚 fault that Northern fears it cannot raise sufficient funds from its traditional commercial sources right now?

Well, Northern is the victim of exceptional market conditions.

Few could have predicted that problems thousands of miles away in the US housing market 鈥� notably the losses on loans to American homebuyers with dodgy credit histories 鈥� would have made investors and financial institutions wary about financing Northern Rock鈥檚 very different and very British homeloans business.

But actually that doesn鈥檛 let Northern鈥檚 management off the hook.

Banks have to expect the unexpected in the way they manage their balance sheets.

To use the ghastly City jargon, they are supposed to 鈥渟tress test鈥� their businesses all the time to ensure they can survive the market鈥檚 equivalent of a nuclear strike.

Northern鈥檚 stress tests were not stressful enough.

But perhaps the biggest criticism to be made of this bank is it massively increased its mortgage lending at the beginning of this year, when most economists were forecasting a slowdown in the housing market and when interest rates were already rising in a way that squeezed its profit margins.

In the first six months of 2007, its net lending rose 47 per cent to just under 拢11bn. And at June 30, it had a further 拢6.2bn pipeline of loans that had been agreed with customers but not yet delivered.

So it is unsurprising that other financial institutions might feel that these mortgages were provided too late in the housing-market cycle to be quite as rock solid as loans made a few years ago.

What鈥檚 perhaps even more embarrassing for Northern is that in its interim statement made earlier this summer, it was explicit that it continued to lend even as the interest rate environment turned against it.

So Northern Rock may not be going bust.

But its reputation has been badly damaged.

Which normally means that there will be a clear out of top management and also that the business may well be sold.

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