Northern Rock Depositors Panic

In a scene eerily reminiscent of the recent run on banking deposits at Countrywide Financial (CFC), British mortgage lender Northern Rock Plc (NHRKF.PK) saw lines stretch around the block, as scared customers withdrew $2 Billion or 4% of the total deposit base, on fears that the bank is insolvent.

From Bloomberg:

Northern Rock Plc branches around the U.K. had lines of customers stretching outside their doors seeking to withdraw deposits for a second day after the Bank of England authorized emergency funding to the mortgage lender.

[…]

Customers withdrew 1 billion pounds ($2 billion) from Newcastle-based Northern Rock yesterday, the Financial Times reported today, citing an unidentified person close to the situation. Northern Rock shares plunged 31 percent to a six-year low yesterday after the company said the British central bank will provide it with an unspecified amount of credit after rising credit costs left it unable to make new loans.

About 250 million pounds was withdrawn from Northern Rock branches yesterday and the remainder transferred via the bank's Web site, the Financial Times said. The total figure equates to about 4 percent of the bank's deposit base, the FT said.

[...]

Northern Rock "remains solvent,'' spokesman Don Hunter said today in a telephone interview, reiterating comments yesterday from the U.K. Financial Services Authority. The bank didn't draw on the emergency lending facility yesterday, he said. ``As far as I know, that's still the case,'' he added.

[…]

Northern Rock will pay a penalty interest rate of close to 7 percent to borrow funds from the Bank of England, the Guardian newspaper reported today, without citing anyone. Darling authorized the emergency funding, saying the Bank of England will step in as the lender of last resort. The terms of the facility haven't been disclosed”

If you look at the writing on the wall, it appears that it’s quite likely that we’ll see more situations like this on both sides of the Atlantic over the next 6-9 months. Just in the last month and a half, we’ve seen Sachsen LB in Germany sell itself in order to avoid additional difficulties over credit market related troubles, a run on Countrywide by worried depositors and liquidity injections by the central banks of the US, EU and Japan. This is on top of the mortgage crisis, credit crisis, surging US foreclosures and the FDIC reporting a 33% YoY increase in the number of member institutions that are losing money, not to mention a 10.9% increase in the number of loans that are 90 days or more past due. Did I mention a consumer credit bubble as well?

However, we haven’t even seen the financial sector’s Q3 results yet, so we really don’t know how bad things are yet. All that being said, whilst I think it’s all but guaranteed that some individual banks will go through some VERY difficult times, I seriously doubt we’ll have a full-fledged global banking crisis on our hands due to the level of diversity within the financial sector, in addition to probability of central bank intervention.

Finally, the FDIC’s quarterly banking profile for Q3 2007 will prove to be VERY interesting, as it will definitely shed some light on the overall health of the US banking sector once the credit problems of the last eight weeks or has been factored in.

Disclosure: The Author doesn’t own positions in any of the companies mentioned in this article. Sources:

Market Watch – “Countrywide Tries to Calm Bank Customers” – August 17, 2007

FIDC – “Quarterly Banking Profile” – August 22, 2007

Bloomberg – “Northern Rock Experiences Second Day of Withdrawals”—September 15, 2007