RogerS":2n4xe3pl said:
Should have let it go to the wall.
The modern banking system is that it is entirely based on faith. The banking system used to be based on tangible things like gold, but since we abandonded the gold standard your money does not actually exist any more, it is just virtual money that only exists because everyone keeps believing in it.
The problem with this is that once people loose faith in one particular bank there is a serious knock on effect that drags down every other bank. As someone else pointed out there is a lot of uncertainty about the Bradford and Bingley, if Northern Rock had folded then B&B would have gone inside a month. And if that happened then a lot of investors (especially the important international ones) would consider that a sign that the UK was not a safe place to invest as the banking sector was shaky.
There are three things about this whole debacle that really annoy me:
1 - The week before Barclays borrowed much more money from the Bank of England for exactly the same thing and not a murmur was heard
2 - At no point have the media been held accountable for the pivotable role they had in the collapse of Northern Rock.
3 - A few people made billions by selling Northern Rock short which exacerbated the slide.
It is a tenant of banking that only about 10% of the cash deposited in a bank is every available for withdrawal (either as cash or as liquids assets available to be given back to the customer when they want it transferred to another bank), the rest is lent out to other people (mortgages, other banks, governments etc). So if there is ever a run on withdrawals from a bank then they can only provide 10% before they have to start cashing in loans - which they can't do easily, so they have to borrow from other organizations which makes them look bad in the eyes of the public.
If the media had not reported this, then it would not have happened. Northern Rock borrowed money (all backs do it all of the time, it is nothing unusual), for a change the media reported on it (either it was a slow news day, or some government lackey wanted a distraction from the latest scandal so suggested it to a friendly editor). A few people start to withdraw their savings. This leads to nice photogenic pictures of people queuing at the branches and the media tell everyone that the bank is about to fail. Which everyone believes regardless of whether it was true or not, so they all go to withdraw their money. The bank can not give them all their money as they have lent most of it to other people already, so they have to go to the bank of England to borrow some, which the media then declare is an example of the corrupt banking sector propping each other up, and that the bank was sure to fail, so even more people tried to withdraw money.
Yes the bank lost money in America, enough to annoy the shareholders, but not enough to make the bank collapse.
The reason that the bank collapsed was because the Telly told the potato people it would collapse and the potato people accepting that without challenging it. I learnt 20 years ago in A-level economics that the easiest way to make a bank collapse was to convince enough people that the bank was going to collapse, something that all of the finance journalists in the country do not appear to have learnt.
