Northern Rock Sale: The Sorry Tale of British Banking

The eagerness to join the queue to buy Northern Rock never came close to matching the rush to line up outside its branches to pull savings out.

But at least the sale means that the beginning of the end of a disappointing British banking saga has arrived.

Northern Rock stood for all that went bad in the UK’s banking system, as those who should have known better bundled recklessly into a headlong rush to throw money at borrowers, believing that the days of easy credit could never end and house prices could never fall.

The Rock dispensed with the idea of backing mortgages with savers’ deposits and instead borrowed huge amounts on the wholesale money markets to fund rapidly expanding mortgage lending – money was cheap, house prices were going up, you couldn’t lose.

It was different this time.

The infamous 125 per cent mortgage was symptomatic of that mindset: you borrowed the entire value of your property and then stuck a bit extra on top to clear any existing personal debts and have some cash to buy some furniture and fit out the new pad.

In theory, if you were buying a place that was big enough for you to not need to move from for a good long while and you were transferring higher interest rate personal debts to a lower rate on the mortgage this was not a terrible plan.

But that wasn’t how many people saw it. What they saw was a shortcut to buying a property, getting some extra cash to spend and, as house prices could only keep going up, soon the property market would have paid off the extra debt for them and they’d be sitting on a nice profit.

Northern Rock wasn’t the only bank doing this, most were chasing the dream to keep profits rising and executives’ pockets full. And our building societies were also guilty of chasing the property and buy-to-let booms – and again keeping executives’ pay packets healthy.

Except it wasn’t different this time.

House prices could fall, easy money wasn’t around forever, and Northern Rock became Britain’s first banking crisis victim, with queues of savers terrified that they would lose all their money.

But this isn’t just a tale of foolish borrowers and greedy bankers, the Government and financial authorities also totally failed to spot or do anything about the colossal problem brewing – but why would you when everyone was making so much money?

That Northern Rock bank run was massively exacerbated by the Government and financial authorities dithering and failing to step in immediately to guarantee savers’ deposits (a penchant for dithering being a characteristic much observed throughout the banking crisis).

Finally now, more than three years after it was taken into state control, Northern Rock is sold.

We have seen it split into good and bad bank, had hopes of it being used as a state-backed Big Society bank to help small business and homebuyers, turned back into a building society, or bundled in with the Lloyds branches struggling to be sold and handed to the taxpayer in free shares.

Instead Northern Rock’s legacy is to deliver a new name among High Street banks.

Let’s hope Virgin Money does better than the sorry bunch we’ve endured over the past decade.