This month will be long remembered by the financial community and by many outside it. Even the most sanguine among us would admit to feeling a chill at the sight of a high street bank besieged by queues of worried savers
Loud assurances from the government, the Bank of England, the Financial
Services Authority and the troubled bank itself did not cease for several days.
However, each TV report covering the latest commitment from Alistair Darling or
Northern Rock’s earnest but quavering CEO Adam Applegarth, was accompanied by
lingering shots of customers waiting outside branches to grab their money.
It seems the worst is over; Northern Rock’s shares were rising again but
dipped slightly on the news that the bank might be sold off cheap. The
government’s backing seems to have done the trick and savers are slowing down
from their run. As calm is restored, everybody from the Treasury to the man on
the street with a few pounds to save will have the opportunity to reflect.
There were several factors that contributed to the crisis. A full analysis
will emerge, of course. But there will be few in the accountancy community who
do not feel that Northern Rock broke a cardinal rule of balance sheet management
by funding long term assets in this case loans to members of the general
public with short term liabilities in the form of loans from banks; behaviour
that can bring about a funding gap.
Why, then, was this not spotted by the auditors? Also, how good was the
firm’s stress testing? Were the various liquidity scenarios worked through while
the sun shone? We will have to wait and see.
Elsewhere, accountants have a major part to play in reassuring investors. A
survey by the BBC revealed that only 47% of the population trusts the media and
only 51% trusts the government. So is it any wonder that together these
institutions failed to dissipate the queues outside Northern Rock?
We and our colleagues in the IFA community must do all we can to ensure the
market is full of the right balance of caution and optimism and that we supply a
rich fund of information and advice to counterbalance any media hyperbole.
In times of uncertainty, faith will be at a premium. While we may have little
direct contact with typical Northern Rock customers, flooding the market with
rationality will ensure the next problem is not escalated so quickly into a
catastrophe.
Richard Ashcroft is group FD at Harvey Nash