September 13th 2007 will be forever etched on the minds of people who banked with Northern Rock.
Those tuning into the evening news may remember the BBC’s business editor Robert Peston telling them that Northern Rock had requested financial assistance from the Bank of England, but there was no need to panic.
But panic they did and the next morning huge queues were forming and the first run on a British bank since 1866 had begun and nothing anyone in government, the media or the Bank of England could say would stop it.
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The first collapse
The proceeding weeks and months revealed the extent of the problems at Northern Rock. Its whole business model was flawed – it borrowed short-term money in the financial markets and then lent it to consumers long-term. It also got involved in the shady world of mortgage securitization.
When global credit conditions deteriorated and Northern Rock’s debtors came knocking on the door it couldn’t pay them back, it was essentially bust. In the space of a week Northern Rock unravelled; nationalisation beckoned, it was then split into a “good” bank and a “bad” bank before being sold to Virgin Money earlier this year.
But in the aftermath of that fateful news report it is not just Northern Rock that will never be the same again. The whole UK financial sector was changed forever. Firstly, confidence that banks were safe was shot to pieces. The problems at Northern Rock uncovered a web of irresponsible lending, casino banking and bonuses in the financial sector that made your eyes water.
Has anything changed
The two biggest differences since 2007 are that, firstly, the public, Government and media scrutiny of banks has reached new highs.
Banks are no longer automatically trusted and bankers are viewed with suspicion. In the past people were jealous of their large salaries and bonus pools, now they are viewed with suspicion.
That meant the credit crunch had one major positive impact on society in that it boosted the level of financial knowledge amongst the media and the general public in a fairly short period of time.
Once taxpayer money went into the banks the public developed a thirst to monitor what banks do, how safe and legal their activities are and how much bankers are paid. Back in 2007 the majority of people barely knew what a bank like Northern Rock did let alone how risky it was.
Is it enough?
The real legacy from the Northern Rock fiasco will be whether this disaster has averted another one like it.
Has the tightened banking regulation and additional oversight, let alone the media scrutiny all helped to stop a potential banking crisis from developing sometime in the future?
We shall have to see, but new banking rules that force banks to save more money for a rainy day so they don’t have to go cap in hand to the Government or central bank when bad times strike will hopefully mean the tax payer doesn’t have to do any more bailing out.
How safe are your savings now?
The second change since 2007 is that today consumers are much more knowledgeable about how their deposits are protected in the event of a banking collapse.
New research by the Financial Services Compensation Scheme (FSCS) found that 66% of people surveyed said they would definitely or probably get their money back if their bank collapsed.
Unsurprisingly, people in the North East – where Northern Rock was based – were some of the most knowledgeable in the country when it came to compensation in the event of a bank running into difficulties, with 73% of people believing they would get their money back.
The FSCS survey also found that even though people are aware of the structures in place to support their deposits, a quarter of those surveyed would still try to immediately withdraw their money from their bank if they thought it was in difficulty. A further 40% said they would “probably” try and withdraw their money.
What does this tell us? Although people are aware of organisations like the FSCS they don’t necessarily trust them. If your bank was to go bust you would actually get £85,000 of your money back within 7 working days. That is a big improvement on the compensation programme in 2007 when only £35,000 was covered and it took up to nine months to get your money back.
The Northern Rock crisis threatened to unravel the financial sector in the UK, which would have been a terrible thing. Banks are the fabric that keeps our economy together. If they had collapsed then the economic recession we have experienced would appear like a walk in the park.
Restoring confidence in this sector was key. However, even with these new back-stops, when it comes to our hard earned cash, compensation or not, the FCS survey shows the British public are not staying on a sinking ship if their savings are at risk.
The banking sector may be safer now than before the Northern Rock crisis, but even though five years have gone by memories of people queuing to get hold of their savings have not faded.