The Run on Northern Rock

If you had visited the centre of Birmingham three days ago, you might have seen a long queue of people. The queue started at the door of a building, and stretched 50 meters to the corner of the street and round the corner.
If you had visited Leeds, or London, or Edinburgh, or many other towns, you would have seen the same thing -- long queues of people waiting for something. What were they doing? Perhaps tickets for a big pop concert had just gone on sale, and the people were queuing to buy tickets before they sold out. But if you looked carefully, you could see that many of the people looked, well, a bit too old to be interested in pop concerts.
No, it was not a pop concert. It was something we have not seen in Britain for many years. It was a run on a bank.
Let me explain. There is a bank, based in Newcastle in the north-east of England, called Northern Rock. It has branches in many towns and cities in Britain. Its main business is lending money to people to buy houses -- this is what we call "mortgage lending" in Britain. A mortgage is an arrangement where property, such as a house, is used as security for a loan. A bank will lend you money to buy a house, but it takes a mortgage over the property, so that -- if you don't repay the loan or the interest on the loan -- the bank can repossess your house; that is, it can take the house back from you. Houses are very expensive in Britain, and most people who buy a house need to borrow money with a mortgage.
Northern Rock has been a very aggressive mortgage lender. Its share of the home loans market has grown a lot in the last few years. In fact it is now one of the top 5 or 6 mortgage lenders in Britain. How has Northern Rock found the money to lend to so many people? Well, some of the money has come from people who save money in Northern Rock savings accounts. But Northern Rock has also borrowed a lot of money from other banks and in the money markets. The money which Northern Rock has borrowed is short term -- that means, it has to repay the money after a few months or a year. But the loans which Northern Rock has made to people to buy houses are long term -- perhaps 20 or 25 years.
Until a few months ago, everything was OK. But then the amount of money which other banks were willing to lend fell, and the interest on the loans increased. One of the reasons for this was the problem in the United States over low-quality or junk lending -- perhaps you have read about it in the papers. Suddenly Northern Rock was in trouble. It could no longer borrow all the money it needed. The news got out. The price of Northern Rock's shares collapsed. Northern Rock assured everyone that it had plenty of money and that no-one needed to worry. But many people did not believe this. People who had saved money with Northern Rock wanted to get their money out. So they queued at Northern Rock's branches, and tried to get onto Northern Rock's website. The website collapsed, and the queues got longer and longer. It was a run on a bank, the first run on a British bank for 140 years.
Eventually the government said that it would guarantee savers' deposits at Northern Rock. The panic subsided and the queues disappeared. But something has changed. For the last ten years, Britain has had low inflation, low interest rates and good economic growth. Many people have borrowed a lot of money to buy houses or cars or to go on exotic holidays. But many economists now think that the years of easy money are now over. Northern Rock may be only the first problem of the new times.

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