Monday, September 17, 2007

Northern Rock and Effect on the Economy

Northern Rock is one of the UK's biggest mortgage lenders. Recently it has experienced difficulties because it had a shortfall of credit. It was unable to borrow from the financial sector and ignominiously had to borrow from the Bank of England. It borrowed from the Bank of England in its capacity as lender of last resort.

Northern Rock suffered a shortfall of credit because

It has built its business on mortgage lending. It has not secured these mortgage debts againts saving accounts.
This year many US mortgage lenders (especially sub prime lenders) have gone bankrupt causing a fall in confidence and shortage of willing lenders. This global credit crunch has hit Northern Rock.

What is the Effect of Northern Rock's problems on the Rest of the Economy?

Directly there is no effect on the economy. Many savers are withdrawing their money; but, it is unlikely that the Bank will go under. Other banks like HSBC are said to be considering taking over Northern Rock.

However, there may be a knock on effect on the UK Housing Market. This episode has dented people's confidence in getting unconventional mortgages. It may be a factor in reducing demand for housing, especially speculative demand. Therefore, it will help reduce the growth of house prices and possibly cause house prices to fall in 2008-09

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