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History "may not repeat itself", but the saga of US subprime loans and their after-effects on global financial markets `rhymes' it.
The rocking of the Northern Rock — the 7th biggest bank and the 5th biggest mortgage lender of the UK that has been hit by the US subprime mayhem which, as Martin Feldstein of Harvard University argued, "Triggered a substantial widening of all credit spreads and freezing of much of the credit markets" across the globe—by its depositors who queued up in front of its branches to withdraw cash appeared to have at last eased with the Finance Minister, Alistair Darling announcing that the Bank of England, which incidentally stood stoically among the major central banks in the current game of pumping liquidity into markets besides cutting interest rates, would guarantee all existing deposits in Northern Rock. Indications are that Darling's pledge to do "everything we can to ensure that the market returns to normal" after a panicked run on the Northern Rock Bank has quelled the crisis.
Reports reveal that in a single day, depositors have withdrawn about £1 bn, which amounts to over 6% of its deposits. Its shares have fallen by more than 30%, and it simultaneously pulled down the prices of other bank shares. Northern Bank is, perhaps, the first bank of the UK in decades to be bailed out by the regulators by providing an open-ended facility, whereupon it can access liquidity by posting mortgages or mortgage-backed securities as collateral. All this has at last saved the bank from the embarrassment of long queues of depositors lining up outside Northern Rock branches across Britain to withdraw their deposits. This `run' on Northern Rock takes us back to 1907, when the US banks experienced a similar crisis. |
