Saturday, September 22, 2007

Northern Rock final notes

The news cycle moves into its final phase. The Northern rock is now obviously safe, no one can be blamed in the government so the last two targets are the Bank of England and the fat cat bosses. At this stage the media are able to accuse people of knowing exactly what would happen and that they stood by and did nothing. Of course it is always easiest to criticise after the event.

Mr King, Bank Of England Governor has defended his actions by saying that to intervene earlier would have been to prop up bad loan decisions. I support him, to have done otherwise would have given a clear signal that a bank can take excessive risks without any consequences. If there were any problems the Bank of England would bail them out.

As for the fat cats they could have seen this coming but in order to build their business they took risks. There is nothing wrong with their business model but it does rely on a prosperous confident inter-bank loans market. When the loan market tightened Northern Rock entered marshy ground. There perhaps should have been an internal emergency plan to deal with the situation.

The one clear thing that has come out of this is what we need to do to stop a run on a bank. Deposits of the general public need to be protected to maintain the confidence in the financial system. The government is currently looking at plans to protect up to £100,000 of any deposit in a bank or building society.

If you have more money than that on deposit in any one bank you should consider spreading the money around and take further financial advice on how to minimise your risk exposure. Remember banks are businesses just like any other, they can go broke. These days because it is all electronic money they can go down fast. Don't put all your eggs in one basket the Bank of England wont always come riding to the rescue.

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