Rescue deal ‘eight months too late’
Apr 22 2008 by William Green, The Journal
THE Northern Rock crisis could have been avoided if a new £50bn rescue package for banks hit by the credit crunch had been introduced last summer, it was claimed yesterday.
Newcastle Central Labour MP Jim Cousins, who sits on the Commons Treasury select committee, welcomed the Bank of England scheme but said it was “eight months too late.”
He also called for a fair system to be introduced with other banks now able to secure central bank support at commercial rates, while Northern Rock has to pay a penalty charge.
Under the new scheme, banks can swap riskier mortgage-backed assets for Government bonds to shore up their finances as part of efforts to increase market confidence and protect the wider economy.
Since the credit crunch erupted last year, banks have suffered from a crisis of market confidence in bonds secured on mortgages, due to rising defaults among high-risk sub-prime borrowers in the US.
This has hit banks’ abilities to raise funds and made them more cautious about lending to each other – leading to more expensive mortgages.
Before being nationalised, Northern Rock said it was hit by the unprecedented closure of money markets where it raised much of its funding – although ministers and regulators say its business model was to blame for it being forced to seek up to £25bn in emergency public support.
Speaking to The Journal, Mr Cousins said: “There would have been no Northern Rock crisis if this had happened in August 2007. There would have been a Northern Rock problem, but most of us might not have even been aware of it.”
He said earlier action could have solved the problem of bank liquidity, but welcomed the Government overcoming “resistance” from the Bank of England to provide further funding.
Senior Newcastle Liberal Democrat councillor Greg Stone said: “Part of the problem was that credit was not available and the Bank of England should have been more pro-active in making credit available.”
But Downing Street said yesterday it did not accept claims the Northern Rock crisis could have been avoided if a rescue package for the financial sector had been introduced last year.
The Prime Minister’s official spokesman said the circumstances surrounding Northern Rock depended on the business model it pursued, adding the Government had provided considerable support to stabilise the bank and prevent any “contagion” spreading to other financial institutions.
PAGE TWO: Your questions on the £50bn rescue package answered.
