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Monday 13 October 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

Management was found from among the middle ranks of the group, the more senior executives of NMB having been let go; a preliminary audit revealed a likely deficit of £113 million, about 22 per cent of the lending book. As deposits fell due they were repaid, until the whole of the NMB’s financing came from the Barclays facility. This too was repaid as we slowly unwound the loans and mortgages.

After eight years, with the mortgage book reduced from £500 million to £30 million, the rump of the business was sold in January 2000 to a Japanese bank. Long before that, the Bank of England had taken the shares of NMB into direct ownership, the balance of the Barclays syndicate loan had been taken on to the Bank of England’s books, and the Bank’s chief cashier had joined our board. Staff numbers at NMB dropped from 250 to about 20 and its premises were downsized. The deficit had come down from £113 million to £63 million. In a sense, the efforts of my board and team had yielded £50 million for the public purse — but there were no telephone-number bonuses, and our pay rises were strictly tied to those of Bank employees.

Four points distinguish the handling of this case from that of Northern Rock. The first is that the whole exercise was kept quiet despite the fact that Eddie George, deputy governor of the Bank at the time of NMB’s collapse, spoke regularly to the press — who never put two and two together to see the underlying political problem, potentially extremely damaging to John Major’s government, which was that wholesale depositors in NMB were being afforded the Bank’s protection while retail depositors of BCCI had been allowed to lose money. At each step in the unwinding, Eddie George would point out, if asked, that there was nothing new about the NMB case. The press abhors ‘old’ news, and gave the story little attention.

Second, no one who had been concerned with the damaged bank when it had been lending was involved in the run-off: a totally fresh team of Bank regulators was put on the case. Equally, as we ran down NMB we let people go from the top, so for those who remained there was always a prospect of promotion. Those responsible for the hopeless lending were let go first: those who make bad loans should never be put in charge of recovering them.

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