John Redwood

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Northern Rock crisis

Following the Chancellor of the Exchequer’s statement to the House of Commons on last month’s Northern Rock crisis, the Rt. Hon John Redwood MP sent the following letter to Mr. Darling, highlighting the irrelevance and poor analysis of his statement:

“Dear Alistair,

Your comment today during exchanges on Northern Rock was irrelevant. I asked you why the monetary authorities kept the credit squeeze so tight in late August and early September, when the markets and regulators knew that this tightness was damaging several leading financial institutions and making business conditions very difficult for all concerned. This is the crucial question of background to the Northern Rock crisis. As you must be aware, institutions other than Northern Rock also found conditions very taxing. The Bank of England lost control of short term interest rates, with market rates reaching 115 basis points above base rate.

You yourself have told us that Northern Rock has a good quality mortgage portfolio. All sensible analysts know that Northern Rock’s problem was not with the quality of its assets – its mortgage loans to customers – but with its liabilities, how it raised sufficient funds to finance its activities.

Your response to me was therefore doubly foolish. To complain that I wish to remove the additional mortgage regulation this government has introduced has no bearing whatsoever on Northern Rock’s ability to raise finance in the market. If the recent mortgage regulation the government introduced worked well in this other area, there presumably would have been no Northern Rock crisis! All the time we did not have such regulation we had no run on a bank.

You need to answer my legitimate question about the very tough credit crunch the UK monetary authorities uniquely persevered with at a time when both the ECB and the Fed were making huge sums available to ease conditions in their markets. Why did they do this? Why didn’t the tripartite group ask the Bank of England to ease credit conditions sooner, before Northern Rock was experiencing a run on its deposits?

I note you are also telling banks they need to offer more longer term fixed term mortgages.  How can they do so without taking more balance sheet risk?  Many depositors want variable interest rate deposits. The supply of matching fixed rate money is limited.

Yours ever, John”