Jeremy Warner's Outlook: Northern crisis rocks financial system
Bank attacked over Rock rescue; Housing correction looks inevitable
Published: 15 September 2007
Little more than six months ago, shares in Northern Rock were trading at an all-time high and the chief executive of Britain's fourth largest mortgage lender, Adam Applegarth, was feted by analysts as the banking sector's pin-up boy. Today, Mr Applegarth's reputation lies in tatters and the Northern Rock brand is very likely toast.
It is hard to recall a swifter or more dramatic fall from grace. Only a small provincial building society when it demutualised 10 years ago, Northern Rock has since grown its share of the UK mortgage market from 3 to nearly 10 per cent, as well as assumed a prominent position in the FTSE 100 index of Britain's leading companies.
Only last June, when I lunched with Mr Applegarth, he boasted of the lowest cost-to-income ratio in the banking sector, and a business model that both made Northern Rock the provider of choice for remortgaging households and enabled him to shower his shareholders with capital repayments and higher dividends. Yet the business model that made Northern Rock so attractive to investors has now proved Mr Applegarth's undoing. Unlike most other substantial mortgage banks, which rely heavily on retail deposits, Northern Rock finances its book largely from wholesale money markets.
This means that it doesn't have to maintain the extensive and costly branch networks of others, but it has also made the bank vulnerable to the seizing up of credit markets we've seen over the past two months. For the time being, Northern Rock is unable to borrow from the markets to finance its business.
Even so, to be forced to go cap-in-hand to the Bank of England for a bail-out is a damning indictment of management, which, despite the warning signs from America of a deteriorating housing and credit market, has been engaged in what with the benefit of hindsight was a completely reckless dash for growth.
In the past year, Northern Rock has shot to the top of the league table of mortgage providers in terms of the proportion of the "new" mortgage market it has won. Nearly one in every five mortgages sold in Britain over the last year has been with Northern Rock. Stellar growth of this sort usually comes at a price, and so it has proved.
Unsurprisingly, Mr Applegarth was trying to make light of his predicament yesterday by portraying Northern Rock as a hapless victim of events beyond its control. Three Spanish banks had availed themselves of a similar facility with the European Central Bank over the past week, he said, and nobody had batted an eyelid. His difficulty, he insisted, was a temporary problem of liquidity. There was no question of Northern Rock going bust.
Well, yes and no. No bank would seek finance from the lender of last resort except in circumstances where it would be unable to honour its obligations if it didn't. This may not technically be insolvency, but it is not that far off.
Everyone was being ultra-responsible yesterday by insisting that depositors had nothing to worry about; their money was quite safe. Yet you can hardly blame savers for queuing down the street to get their money out. Better safe than sorry.
