It is interesting to learn that Alistair Darling is establishing a procedure should another Northern Rock style crisis occur, but is this really the answer? Surely the most important measure is to ensure that no bank gets into the same situation. The problem arose because Northern Rock decided they could make money by lending to people that could not afford such a high level of debt and without a sufficient margin in the security offered.
Naturally we do not want to return to the boom and bust style of life but there are lessons to be learned or remembered from those times. I admit that I now qualify for a bus pass and life has moved on in the past thirty years but none of us can just march on without balancing the books.
In my early days of banking when the bad debt book started to increase the lending criteria was strengthened and perhaps that should be considered again. Another problem may be the way that lending decisions are now automated and there is no personal input.
Earlier this week I visited my bank to open a new account and even though I did not want to borrow any money was asked a lot of questions including how much I spent on clothes a month and all the figures were fed into the computer for credit scoring purposes! The figures were far from complete but the Bank official was satisfied they added up and if I now want to borrow money they have my “score” and the computer will give the answer. It is time to return to return to the “good old days” where there was a qualitative assessment rather than relying solely on the figures.
The Bank Manager’s “gut feel” must be rediscovered and used in the decision process and the Bank Directors must put the reins back into the hands of the banks and away from the marketers!
It would be nice to get back to the days when the local bank manager had some authority to make his own decisions on lending matters - rather than the current methodology of being decided solely by strict underwriting criteria - but realistically this is not going to return to the high street.
However I disagree with your assertion about the cause of Northern Rock’s problems being that “they could make money by lending to people that could not afford such a high level of debt and without a sufficient margin in the security offered.”
What is undeniable is that Northern Rock’s aggressive mortgage pricing let them grow their market share substantially in recent years. They did offer a mortgage/unsecured loan mix of up to 125% LTV in certain limited circumstances, but, with that exception, I would be very surprised if their lending quality was in any way worse than that of the vast majority of their competitors.
Northern Rock’s problem arose because their business model was overly reliant on raising the majority of their funding requirements through the wholesale market.
It is easy to say with hindsight but this business model was fine while the market had an appetite to invest in such securitisations.
The impairment losses suffered by lenders in the US sub prime market put paid to the appetite and this led to the debacle.report this comment
Mr black may be correct in stating that the lending criteria of Northern Rock was no worse than their competitors. If that is so and many others are lending five times salary then we can expect a lot more problems!report this comment