The focus of the media has been very much on the collapse of prices and of the volume of transactions in the residential market where average house prices are now around 20% below their peak in autumn 2007. But arguably the state of the commercial property market is in an even more parlous state.

The findings of market specialists including the Royal Institute of Chartered Surveyors (RICS) paint a truly grim picture:

• Available commercial, property space is rising at a record level with Central London being the worst spot geographically and retail being the hardest hit business sector – particularly following the high profile demise of a number of high street chains.
• Occupier demand and enquiries are now running at their lowest levels for over 10 years
• Activity across all areas of the commercial property market is in decline and the deepening recession seems set only to accentuate this downward spiral.
• Property owners are having to offer increased incentives to secure lettings

In the good times, pubs borrowed money against their property

But this decline in the commercial property market does not just adversely affect those looking to let property space (whilst benefiting those looking for space).

In the boom years, supermarkets and pub chains became so-called ‘property plays’. In a rising property market, they could make easy profits from selling and then leasing back properties. But in a falling market, their share prices have because of the importance of property in the balance sheet. Particularly, as did the pubs, when they borrowed on the strength of their property portfolios.

Indeed, it is partly the leverage behind the pub chains which has led to 39 pubs closing per week! Both shareholders and the lending banks – and HBOS was a major lender on property development – have got their fingers well and truly burnt.

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When Porsche announced in October last year that that it either owned, or had the right to, 75% of VW’s shares (with another 20% being owned by the German state of Lower Saxony) VW’s share price rocketed, rising over two trading days from €211 to €918. This made VW, temporarily at least, the most highly valued company in the world.

VW's share price rocketed, rising over two trading days from €211 to €918

This staggering increase in price was accentuated by the fact that a number of fund managers had been taking up ‘short-selling’ positions in VW - selling the shares in the expectation that their price would fall in the future. If this had happened the shares would then have been bought back at a profit. But Porsche’s announcement meant that only 5% of VW shares were not controlled by either them or by the state of Lower Saxony, where VW is based.

So confronted by this shortage of available shares the fund managers fought to cover their ‘short’ positions by buying VW shares. But this inevitably drove VW’s share price skywards. This resulted in huge trading losses for the funds that had engaged in short-selling.

Indeed the increase in VW’s share price has been great news for Porsche: in its last financial year it made circa €1 billion in operating profits from vehicle production but overall pre-tax profits were €8.6 billion, due largely to the €6.8 billion rise in the value of its holdings and options positions in VW shares.

Black Porsche Cayenne Turbo.

There have also been the regulatory controversies associated with the takeover - foremost of these being the fact that the Chairman of VW’s Supervisory Board is Ferdinand Piech, the grandson of Ferdinand Porsche, the founder of the Porsche company! Indeed the Porsche and Piech families have between them control of the voting shares of Porsche - although it has been many years since any family member has run the company. Some observers have questioned whether Ferdinand Piech’s position has given rise to a conflict of interests in respect of the takeover.

Another issue relates to Lower Saxony’s holding in VW. Under German law a shareholder with a holding of 25% or more of a company’s shares can veto its strategic decisions. But for VW the threshold for this power of veto is set at a 20% share holding under a special law passed in the 1940s.

The state of Lower Saxony, with its 20.1% stake, therefore has the right to block VW’s strategic initiatives. Given the lack of flexibility this gives to those running the company, Porsche, in anticipation of the completion of the takeover, is challenging this special law.

Then we have a Swedish angle! Now that Porsche has gained a majority stake it is statutorily obliged to make a takeover offer for the Swedish truck maker Scania, where VW owns 69% of the voting shares. This is unlikely to deter Porsche which will probably only make an offer that will be readily rejected by Scania

It is perhaps ironic that the economic backcloth to the takeover has been one of falling stock markets and plummeting car sales in Europe and elsewhere around the globe. Yet Porsche has made vast sums out of its share holding in VW and is poised to swallow a huge car manufacturer whose empire includes Audi, Bentley, Lamborghini, Seat and Skoda.

Meanwhile the fund managers who have incurred huge losses by betting the wrong way on the price of VW’s shares may find themselves having to trade in their Porsches - perhaps for a VW!

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Today, as a Lecturer at The Open University, I could, if I wanted, turn on my computer click the mouse half a dozen times and get a loan for £18,500 (equivalent to over £5,000 in 1979 money) without talking to anyone. And I thought we were in the middle of a ‘credit crunch’! Oh well, it saves on dry cleaning costs!

Credit card.
[Image © copyright AbleStock.com]

Of course the intervening 29 years may have changed the assessment of my credit worthiness ..so perhaps we are not talking about a like-for-like comparison. But during the intervening years there has been a ‘sea change’ in the access to and availability of credit. This change has had a hugely influential impact on the economy, on the housing market and on people’s lifestyles.

So how and why did the credit environment change, and are the recent developments in the financial services sector now threatening to take us back to the years of more considered and tighter credit?

The increasing availability of credit can be traced back to the so-called ‘liberalisation of financial services’ in the 1980s. This much used term relates to the changes in the financial services industry, prompted in part by government legislation that encouraged financial services providers like banks and building societies both to expand and diversify their activities, and to become more competitive in their operations.

Changes occurred quickly. Prior to this ‘liberalisation’ you were normally expected to save with a building society before applying to it for a mortgage. Even if you were granted one you had to queue - mercifully not literally - for the funds. Relationships with banks and building societies were long term and people did not tend to flit from one provider to another as they do now.

Prior to this 'liberalisation' you were normally expected to save with a building society before applying to it for a mortgage

Post ‘liberalisation’ the financial services providers competed on price more competitively and marketed their products more keenly (witness the ‘junk mail’ we still receive). The benefits for the consumers during the sustained boom from the early 1980s until the past year (interrupted briefly, and with some pain, by the slump in the housing market from 1991 to 1994) have been obvious.

Readily available credit fuelled a boom in house prices, making all home owners feel wealthier. New entrants into the financial markets – particularly the credit card market – provided a further dimension and scale to the growth in personal indebtedness sustaining in its wake a consumer boom throughout the country. In past fifteen years the level of personal debt in the UK has ballooned from £400 billion to nearly £1,500 billion - a staggering £1.5 trillion of outstanding mortgages, loans and credit card debt!

For the providers of financial services business was good. With credit booming profits rose whilst the credit exposure to the borrowing was (and is) contained by the growing value of property against which the vast majority of the debt (currently 84%) is secured.

A love affair was in place: the public loved the lifestyles that cheap and readily available credit could provide. For the lenders the expansion of credit meant growing balance sheets, growing profits and growing pay for those running the businesses.

A love affair was in place: the public loved the lifestyles that cheap and readily available credit could provide

So how and where did it all go wrong? The immediate source of the current problems was the collapse in the sub-prime mortgage market in the US. This did not directly impact on households in the UK - rather it meant that the funds UK financial institutions relied on to finance their lending dried up as banks became more reluctant to lend to each other.

The drying up of funds pushed up the cost of credit and triggered a fall in house prices – since availability of credit is a key house price driver. The fall in house prices has made households feel less wealthy and so discourages consumer spending. The fall in the price of property, against which most personal debt is secured, has made lenders more cautious about their lending policies.

For those borrowing - or seeking to borrow - the current environment is the worst for decades. Lenders have tightened their lending policies and increased the cost of borrowing - for example by ‘risk-adjusted' pricing on higher risk loans.

The impact of the debacle in the financial services industry - particularly the demise of HBOS and Bradford & Bingley - has also diminished the volume of credit available to households. The capacity to meet credit repayments has also been squeezed by the impact on household budgets of rising fuel and utilities prices.

For those lending - and there is not much sympathy for the institutions whose lending policies are deemed to have fuelled the boom-bust in the credit markets - there is the prospect of arrears, bad debts and losses. The weakest will lose their independent existence as HBOS,  Alliance & Leicester, Bradford & Bingley and Northern Rock already have.

Having spent nearly thirty years in love with credit many households and lending institutions are now left ruing their financial relationship.

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Much has been made in the media that HBOS was a victim of ‘short selling’ by City traders. This practice which involves selling stocks that are not currently owned with the view of buying them back in the future at a lower price is a common trading strategy. The view held by some commentators is that aggressive short selling of HBOS’s shares drove down the share price to the point where public perception was that the bank was in trouble. With the Government and the Financial Services Authority  not wanting a repeat of a ‘run on the bank’ that we saw with Northern Rock in 2007, with savers queuing to get their cash out, the authorities acted swiftly to end HBOS's independent existence.

By placing it in the ownership of Lloyds TSB, the hope was that some semblance of confidence in the banking system would be restored. Given the size of HBOS – at £681 billion of assets it is seven times larger than the Northern Rock was when its problems surfaced in September 2007 – the Government simply could not contemplate a nationalised solution to the problem. Given the perceived impact on HBOS’s share price of the alleged short-selling the Government and the FSA also moved quickly to outlaw the short selling of the shares of other financial institutions.

Was HBOS a victim of short selling or rather an institution that weakened itself through its impaired business strategy?

But was HBOS a victim of short selling or rather an institution that weakened itself through its impaired business strategy? Many observers have pointed to HBOS’s growing reliance in recent years on wholesale funding from the world’s capital markets which made it, like Northern Rock, vulnerable to the illiquid conditions we have seen in the wholesale markets since the emergence of the US sub-prime mortgage crisis in summer 2007. Additionally HBOS was active in enlarging its share of the UK mortgage market just at the point that house prices peaked. The subsequent marked fall in prices has left HBOS vulnerable to bad debts as borrowers with negative equity default. There have also major losses in treasury assets – investments in asset-backed and other securities which have fallen in value in the wake of the sub-prime collapse.

Given the business backcloth it was perhaps hardly surprising that the process of raising more capital by the £4 billion ‘rights’ issue of new shares in HBOS was troubled with many investors refusing to take up their rights to further shares. This also was a factor which placed doubts in the minds of investors about the worth of HBOS’s stock - doubts that became reinforced by the reduction in dividends being paid out.

So was the reality that it was investors - particularly the fund managers - who brought on HBOS’s demise simply by dumping an increasingly unattractive stock? This seems more plausible than simply blaming the bank’s demise on ‘short sellers’.

The bank will be a colossus in the retail financial market with 142,000 employees and a 28% market share

Whatever the cause the outcome and consequences of the takeover by Lloyd TSB are huge in more senses than one. The bank will be a colossus in the retail financial market with 142,000 employees and a 28% market share - in fact if it had not been for the crisis conditions competition law would not have allowed the takeover to take place. The risk of such dominance is that Lloyds TSB will now have greater power to set the prevailing levels of mortgage and savings rates in the UK.

A further consequence is that there will be substantial job cuts given the overlaps between the two banks - for example in the branch networks and in the ‘back-office’ processing businesses.

For Scotland the blow is potentially substantial - both economically and to the country’s self confidence since, with the Royal Bank of Scotland, the Bank of Scotland dominated the Scottish banking industry. Lloyds TSB has, though, pledged to keep jobs in Scotland, retain the use of HBOS’s headquarters in Edinburgh and continue to print Bank of Scotland bank notes.

HBOS building.
[image by JohnConnell, some rights reserved]

Additionally the disappearance of the Halifax - predating by just a few days the rescue of the Bradford & Bingley - represents the failure of the demutualised building society business model. All those societies that converted to banks amidst much heralded plans to grow their businesses and explore new avenues for making money have now, within a handful of years, lost their independent existences.

At the time of writing, however, the approval for the takeover by the shareholders of Lloyds TSB has still to take place. In the light of the further collapse of the share price of banks globally in late September and October, and the move by the UK government to recapitalise the banks, a renegotiation of the original terms of the takeover inevitably had to take place. Under the revised terms made public on 13th October HBOS shareholders will receive 0.605 Lloyds TSB shares for each HBOS share. Additionally up to £17 billion of capital may be invested in the combined institution by the Government.

The amount of State finance will be determined by the shortfall in the demand by existing shareholders for further shares in the banks offered to them via forthcoming ‘rights’ issues. Given the distinct possibility that a substantial proportion of HBOS could end up being owned by the Government - making Lloyds TSB itself partially nationalised if it absorbs HBOS - there remains the risk that Lloyds TSB’s shareholders may not have an appetite for the takeover.

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The collapse of the US sub-prime market in 2007 has resulted in many banks incurring huge financial losses as their investments in asset backed securities linked to the US mortgage market plummeted in value.

Yet this was only the first domino to fall over in a calamitous chain reaction of financial events that now threatens the wellbeing of the UK economy and particularly the housing market.

The exposure to losses by banks exposed to the US market quickly led the financial markets seizing up. So called ‘inter-bank lending’ stalled with lenders becoming increasingly wary about which financial institutions to place their funds with.

The domino effect.

[photo © copyright Photos.com]

This quickly led to interest rates in the financial markets rising – an inevitability given the lack of supply of funds – with the result that market rates moved over 1 per cent higher than the Bank of England’s official lending rate (which normally dictates the level of rates in the financial markets).

For institutions reliant for funding on the ‘wholesale’ financial markets – as opposed to the ‘retail market’ of personal savings – this shortage of funds and a squeeze in their cost proved disastrous. The greatest UK casualty was the Northern Rock Bank: with nearly three-quarters of its funding coming from the wholesale markets the bank quickly found that it could not finance its existing mortgage loans and other assets. Ignominiously it was forced to seek help from the Bank of England. What happened next is well known: the personal investors who had funds at the Rock queued to get their money out. This forced the UK government and the Bank of England both to guarantee the Northern Rock’s savings liabilities but also to step in and provide a ballooning level of financial support in excess of £25bn as investors withdrew their money. Eventually in March 2008 – after a failed attempt to organise a sale – the government was forced to nationalise the bank.

For other, more prudent, UK mortgage lenders the ‘knock on’ consequences of the Northern Rock debacle were severe. First they suffered from the higher cost of funds as institutions reduced their lending to the sector – despite the fact that these mortgage lenders had materially less dependence on the financial markets for funds.

With limited funds, falling liquidity and a higher cost of funding mortgage lenders started to raise the cost of mortgages – despite three cuts in UK base rates initiated by the Bank of England taking rates down to five per cent. Additionally funds started to become less readily available with products being withdrawn, and the deposits needed to obtain mortgages rising. Mortgage approvals in April were the lowest since records began in 1993. The days of readily available mortgages – and those offered at 100 per cent of the value of the property being purchased – have now disappeared.

"the nice decade is behind us"

With mortgage availability decreasing the demand for property has fallen. Consequently, property prices have started to fall.  House prices are now, on average, around four percent lower than their peak in October 2007.

The weaker position in the housing market is only making it more difficult for mortgage lenders to borrow money in the financial markets thus reinforcing the vicious cycle – this despite some late efforts by the Bank of England to inject liquidity into the financial markets by taking mortgage backed assets from the mortgage lenders and swapping them for government bonds which may, in turn, be used collateral for borrowing cash.

Perhaps the only winners from this situation are first-time buyers, who may now have an easier step up to that first rung on the housing ladder, and investors, who are now seeing mortgage lenders compete aggressively for their funds by raising savings rates.

As for the housing market – tighter credit, limited funds and the prospect of a buyers’ ‘strike’ spell bad news for house prices and hence for the quality of mortgage lenders’ balance sheets. Mortgage arrears and repossessions may not have risen substantially yet – thanks to the continued buoyant level of employment - but a slower housing market spells slower UK economic growth and, in due course, higher unemployment.

With the added strain of higher food and utility costs and soaring petrol prices household budgets will be coming increasingly under pressure – and there will be less credit available to bail them out. Thus upward pressure on arrears and then repossessions could be the next stage in an uncomfortable scenario for the UK housing market and the mortgage lenders.

As Mervyn King, the Governor of the Bank of England, remarked a few days ago ‘the nice decade is behind us’. Certainly, with the shrinking availability of mortgages, the decade of booming house prices is well and truly behind us.

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The term relates to the aggressive selling of worthless investments to private investors by unauthorised overseas firms – mainly based in Spain, the United States or Switzerland.

Although the exact nature of the investments being sold varies from scheme to scheme it usually involves illiquid and valueless shares in obscure overseas companies. Aggressive selling encourages the targeted investors to buy these shares on promises that their price will rise sharply. Some schemes have also involved false share deals to make the investments appear valuable. Once the boiler room has secured money from investors it may disappear and then later reappear under a different name. As for the shares they’ve sold - their price then plummets and the hapless investors can only watch helplessly as the losses mount. In fact with no ready market for the shares, they’re left holding their investments that may become completely worthless.

"hapless investors can only watch as losses mount"

A recent tactic used by boiler rooms has involved conning both investors and small businesses out of their money. A typical scheme involves a boiler room approaching a company and offering to raise capital by selling the company’s shares to investors. These shares are then sold to private investors at anything up to 100% above the price agreed with the company. Once the shares are sold the boiler room takes a fee from the company for organising the share sale – sometimes as much as 90% of the money raised - and then disappears. The company is then left with the prospect that the investors will then demand from it a refund through the repurchase of the shares issued - even though the company only received a percentage of the funds actually raised.

The typical investors targeted by boiler room selling are middle-aged professional men, many with considerable investment experience – a profile deemed to maximize the chances of extracting money via investment scams. A recent Financial Services Authority (FSA) survey found that 81% of boiler room victims were men and 64% of victims were aged over 50. Members of this socio-economic group are more likely than others to have funds available for investment and, perhaps, a belief in their investment prowess and an appetite for the riskier shares that apparently offer the prospect of high returns. Victims of the scams lose on average £20,000 - although losses of over £100,000 have been reported.

The FSA - which regulates the selling of investments within the UK - has detected well over 100 unauthorised investment firms selling into this country. The problem for the FSA is that the companies involved in these boiler room sales are based overseas and are therefore outside the FSA’s jurisdiction. However the FSA has had some success in tackling some UK companies that have been involved in supporting boiler rooms by, for example, approving the promotion of their schemes.

Guidance has been provided by the FSA on the survey above, and certainly if you’re a potential investor you should check to confirm that the companies you are dealing with are authorised by the FSA.

But the key point to note is that if you’re phoned ‘out of the blue’ from overseas by a boiler room, do not to be drawn into any transaction.

If you’re contacted about an investment opportunity, consider the following:

• Is the company authorised by the FSA?
• Is the company calling from the UK?
• Have you solicited the enquiry?

If the answer to these questions is ‘no’ then you may well be dealing with a boiler room.

Remember if an investment sounds like it is too good to be true, it probably is too unsafe to be purchased!

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Such charges are a major money spinner for the UK banks. Whilst it is unclear exactly how much UK banks earn from them, best estimates suggest a figure of between £2 billion and £3.5 billion a year. The consumer campaign against these charges has made the banks start to talk about the possibility of charging all customers for current accounts to compensate for the revenue stream that would be lost if these unauthorised overdraft charges are deemed unfair.

Arguably the court cases are being won by customers because the banks are not adequately defending the actions - relying only on a written defence and not turning up in court to argue their case. This tactic has resulted in judicial criticism from several County Court judges. Additionally some banks have been settling cases out of court, perhaps because the time and cost of even a limited defence in court is not viewed as being cost effective even if judgment is made in their favour.

Over the past twelve months the story has developed further, with attention focussing on action to clarify the legality of these bank charges.

In March the Office of Fair Trading (OFT) announced a formal investigation into the fairness of unauthorised overdraft charges. This followed on from the OFT’s initial review where it concluded that it shared public concern about the level and incidence of such charges. The OFT recognised, though, that applying the general principles it had set out in 2006 in respect of credit card charges - where the OFT recommended a maximum default charge of £12 - was not straightforward.

Subsequently, in April, the OFT announced details of a more wide ranging investigation into bank charges - including the examination of so-called ‘free banking’ and the implications of moving towards the charging of customers for provision of current account. This investigation sits alongside that into the fairness of unauthorised overdraft charges.

Then in May the Lloyds TSB became the first bank to successfully defend actions by customers trying to reclaim charges, with victories in the Birmingham and Lancaster County Courts. Other banks are now using these judgments to defend cases brought against them.

At the heart of the issue lies the question of whether the 1999 ‘Unfair Terms in Consumer Contract Regulations’ (UTCCRs) apply to unauthorised overdraft charges. The banks believe the rules do not apply; the OFT believes that they do. So given the lack of clarity the OFT launched proceedings in the High Court in July for a legal declaration on the applicability of the law. The other parties to the test case are the Abbey National, Barclays Bank, Clydesdale Bank, HBOS, HSBC, Lloyds TSB, the Royal Bank of Scotland and the Nationwide Building Society. Together these current account providers account for circa 90% of personal current accounts in the UK. The parties to the action are all interested in a timely and orderly resolution of this legal issue. Clearly the banks need to know where they stand on a matter which has attracted so much adverse publicity for them.

In September the OFT announced that it would consider dropping the test case if the banks unilaterally cut charges significantly. Under these circumstances it would no longer be in the interests of consumers to press on with the case. Currently, however, the OFT is still set to continue with its test case which is scheduled to be heard early in 2008.

The outcome of this case will shape the future not only for such overdraft charges but, in all likelihood, for the charging for the provision of current accounts for all customers.

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In September Northern Rock - a bank formed by the conversion of the Northern Rock Building Society to banking status in 1997 - found out the realities of a liquidity crisis with their customers queuing to withdraw their savings. This followed news that the bank had been forced to go ‘cap-in-hand’ to the Bank of England, the ‘lender of the last resort’, for an emergency loan. This was the first ‘run’ on a UK bank by its depositors for more than 150 years.

The immediate cause of the crisis was the drying up of liquidity in the global institutional debt markets - known as the ‘wholesale’ markets - following a rise in mortgage defaults in the US. These defaults were concentrated in ‘sub-prime’ mortgages - home loans to borrowers with a poor credit quality. These events made financial institutions reluctant to lend to each other since no-one was entirely sure how much exposure each had to the losses arising from the impaired US mortgage market. Inevitably with the shortage of liquidity the cost of money - interest rates - was driven upwards. In the UK, money market rates rose to close to 7% despite the fact that base rates were still at 5.75% (normally money market rates are very close to the prevailing level of base rates).

The reactions of the UK and US Central Banks were starkly contrasting. In the US, the Federal Reserve Bank pumped billions of dollars into the markets to restore liquidity. Additionally it prompted the Bank of America to take a stake in the troubled home loan company, Countrywide, thereby averting the risk of its collapse. In the UK the Bank of England was less interventionist and only offered limited support to the beleaguered markets.

But of all the financial institutions in the UK why did the Northern Rock turn out to be most vulnerable to the shortage of funds in the wholesale markets? Here we need to examine the underlying causes of the crisis.

Northern Rock was becoming more and more reliant on the wholesale markets

Recently the Northern Rock had been building up its mortgage portfolio very rapidly, with growth of 12% in the first half of 2007. Simultaneously it was becoming more and more reliant on the wholesale markets for finance, with 70% of its funding coming from this source. By contrast only 27% of its finance came in the form of ‘retail funds’ from personal savers. Additionally, like many other banks, the Northern Rock had been parcelling up their mortgage assets and placing them into ‘special-purpose’ companies. These companies raise funds in the wholesale markets to finance the mortgages by issuing ‘asset-backed securities’. By operating in this way banks are able to boost the amount of lending they are able to undertake. Northern Rock engaged extensively in this activity through its ‘Granite plc’ companies.

Building the mortgage portfolio using this approach is fine so long as the global financial markets are operating smoothly, with funds readily available, and the borrowing institution remains creditworthy. But with the drying up of liquidity in the wholesale markets the Northern Rock’s business model began to unravel.

Compare the Northern Rock’s position with that of the building societies who are legally unable to fund more than 50% of their business from the wholesale markets. The rest has to come from personal savers. Indeed the largest building society, the Nationwide, has a wholesale funding ratio of only around 30%. So as funds became scarcer in the wholesale markets the Northern Rock found itself in an exposed position and was unable to fund its mortgages and loans.

The crisis also exposed the maturity mismatch that banks and building societies have to manage. Most of their funding - be it retail or wholesale - is short term in nature and either matures or can be withdrawn by investors within months. By contrast mortgage advances are usually for long term periods of up to 25 years. This mismatch helps to generate profits since short term borrowing is cheaper for the banks than long term. But it comes with the risk of a liquidity crisis if those short term funds become scarce. Even with the store of liquidity that the Northern Rock was required to retain to accommodate possible outflows of savings, the high wholesale funding ratio and the subsequent ‘run on the bank’ by personal customers, when news of the emergency loan from the Bank of England materialised, were enough to send the Northern Rock into financial submission.

All this happened despite the fact that there is no evidence that the credit quality of the Northern Rock’s assets - its mortgages and loans - is in question. It currently has relatively low levels of both arrears and property repossessions. Despite some fears that house prices in the UK are currently overvalued, house price inflation remains close to 8% p.a. So what we are looking at here is not a credit crisis in respect of Northern Rock’s assets - rather an inability by the bank to fund those assets.

In response to the crisis the Chancellor of the Exchequer, Alistair Darling, announced that customers of the Northern Rock would have their savings guaranteed by the Government. This move effectively ended the ‘run’ on the bank. Subsequently he announced that the maximum investor protection for all UK savers would be raised from £31,700 to £35,000.

The whole episode has raised questions about the operations of the Bank of England. Critics say it moved too slowly to deal with the growing lack of liquidity in the financial markets. Would it also have been wiser not to disclose publicly the loan deal for the Northern Rock - since disclosure resulted in the collapse in the confidence amongst Northern Rock’s customers? The role of the Financial Services Authority (FSA) has also come under scrutiny. Did it fail to identify the scale of the financial risks being run by the Northern Rock with a business model that was so dependent on there being no disruption in the wholesale markets?

As for the Northern Rock, with its once respected brand in tatters, with the emergency Bank of England loan now totalling £16 billion, with its credit ratings cut and with its share price down by over 80% since the start of the year the bank is now prey to predators looking to make an acquisition.

Find out more

• Join the discussion - how do you think the Government should have handled the crisis? Should banks change the way they operate?
• Calling companies to account
• Run on the Bank: Northern Crock - the Money Programme investigates the fall of Northern Rock
• Timeline: Northern Rock bank crisis
• Why do we get into debt? - is debt always a bad thing?
• You and Your Money - don't let your money be the boss of you
• Take it further - the Open University Business School offer a range of courses covering personal and institutional finance issues

About the author

Martin Upton is lecturer in finance at the OU Business School. Previously he spent 20 years in treasury management, including 12 years as Treasurer of Nationwide Building Society. Martin's particular interests are financial services, the housing market, financial markets and risk management.

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