April 9, 2008
How ministers made a second Northern Rock more likely
It seems odd given what has happened since.
But a bill* published last year gave new powers to building societies to borrow more from the wholesale markets. That is, the ones which enabled Northern Rock to grow like topsy and then implode. The bill has increased the maximum wholesale borrowing level from 50 per cent to 75 per cent.
Luckily, the timing means few if any building societies will have taken advantage of this new freedom. Even if they wanted to - unlikely given the Rock disaster - the credit markets have been frozen.
The purpose of the change was to place building societies on a level playing field with banks. In theory this could help create more long-term (25-year) fixed mortgages, something which Gordon Brown is keen on.
Lord Davies of Oldham, deputy chief whip in the Lords, told a debate in October that “in the light of recent events in wider financial markets, we will want to consider carefully whether such a power should be used.”
Later he added:
“The concentration of funding will also pose risks that need to be effectively managed by firms. The recent case of Northern Rock is a clear example of the importance of risk management in this regard.”
Just when the government should have been worried about the growing credit bubble they were taking steps to encourage building societies - Britain’s most prudent lenders - to loosen up. Bizarre in retrospect.
* Building societies [funding] and Mutual Societies (Transfers) Bill
