Only three days ago, the Governor of the Bank of England, Mervyn King, was assuring the House of Commons Treasury Committee that Britain was relatively well placed in the current financial turmoil, that there was no need to inject massive funds into the market as the US and European authorities had done, and that he saw no reason to rescue high street banks from the consequences of their improvident lending.
Three days later, the Bank has been forced to do just that, injecting an extra £4.4bn of funds into the money markets and, late on Thursday, moving to provide emergency assistance for the beleaguered Northern Rock. And yesterday saw something not seen on British streets for decades: sheer panic, as savers lined up to withdraw money from a high street lender.
For all Mr King's protestations – that the Bank had always said it would step in as a "lender of last resort" if circumstances warranted it – this represents a sharp about-turn on the Bank's part. It should be seen as a clear sign of the pressures the global financial system is now under. Not that the ordinary consumer needs to panic, certainly not at this stage.
Northern Rock is not a massive financial institution. Indeed, despite a determination to raise its market share, it is still only the fifth-largest British mortgage lender and a mere tiddler by international standards. The Bank of England's emergency funding should support it, at least in the short-term. Over the longer term, the market should be able pick up the pieces without loss to borrowers or savers, even if the shareholders take a beating.
This week's action by the Bank, however, is the first major rescue of a high street lender in 30 years. Back then, the crisis concerned a series of fringe banks and the ramifications of their collapse was contained by a rescue operation orchestrated by the Bank of England. This time, the potential collapse concerns a consumer lending group providing one tenth of the nation's mortgages. The rescue, when it finally arrived, had to come not from the commercial banks but the central Bank itself.
The authorities argue that, in this case, Northern Rock's problems were not the result of its own profligate lending but the global liquidity squeeze which deprived it of essential funds. That may be true. But it is also true that Northern Rock got itself in an exposed position by a deliberately policy of lending long on house purchases and raising short-term funds on the money markets in an aggressive pursuit of market position. In this it was not alone. The pursuit of market position through ever more expansive lending has been a common feature of the whole banking industry.
At a time of cheap credit, banks have sought new business through the development of more complex debt instruments. The problem of sub-prime loans has already been highlighted in the US but the troubles have begun to affect other markets, including leveraged buy-outs. And the most worrying feature is that no one – neither the banks nor their supervisors – seem certain of just what the liabilities amount to.
"Serves them right" is one response. But the problem for financial authorities, and for the rest of us, is that crises in one area may quickly gather pace to take in the whole market, particularly if investors start to worry and stop lending – as was the case with Northern Rock.
"No panic" is not a bad rallying cry for the moment. But this crisis is far from over and, on the evidence of the Bank of England's action this week, the central authorities are still a long way from either understanding its true dimension or co-ordinating their action to anything like the degree required to see it through.Reuse content