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Saturday 19 July 2008

How to rescue a bank: be firm, be quick, be quiet

Ian Hay Davison draws lessons for the handling of the Northern Rock crisis from his experience as chairman of National Mortgage Bank after its collapse in 1992

To judge from the media coverage of Northern Rock, one might imagine that the circumstances of a bank collapse have never occurred before — or at least not for 150 years. But this is not the case. There have been several in recent years, including those of Johnson Matthey and Barings. But the closest parallel is one that is less well known: the collapse of National Mortgage Bank (NMB), of which I was appointed chairman in February 1992 to supervise the run-off of its business.

The story begins with the collapse of the fraud-ridden Bank of Credit and Commerce International in 1991. This was not the direct responsibility of the Bank of England, but it had the effect of causing collateral damage to secondary banks in the UK. The largest of those affected was NMB, a wholly-owned subsidiary of a quoted company called National Home Loans. NMB, which was about half the size of BCCI, financed loans to homeowners and small businesses through the wholesale money markets. The loans were packaged up and sold on, in a securitisation programme similar to that followed by the American subprime lenders. NMB’s loans were mostly subprime too, though the word was not then part of British banking vocabulary.

In February 1992 NMB was forced to turn to the Bank of England because the supply of money market funds was drying up. The Bank acted promptly: just how promptly I don’t know, but in the earlier case of Johnson Matthey and the later case of Barings, matters were resolved within a week — as indeed seems to have been the case last month with Bear Stearns, in the hands of the US Federal Reserve. The Bank announced the formation of a syndicate of 26 banks led by Barclays to provide a facility of £500 million to support a reformatted NMB: it would cease lending, its deposits would be ring-fenced and its loan book would be run off.

A new board and chairman would also be appointed. Although NMB remained a subsidiary of National Home Loans, it was controlled by a board appointed by the Barclays-led syndicate, and closely guided by the Bank. This guidance and the associated guarantee by the Bank to the syndicate were not announced at the time.

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