There are voices of sanity out there. Tim Congdon has written several sensible pieces on the Rock affair in the FT. He points out in the latest that the ECB has bailed out the Spanish banks in a way the BoE refused to do for NR. I’m a little surprised, though, that he doesn’t mention that at least one Spanish bank – Santander, which owns Abbey – directly competes in the mortgage market with UK banks. They – and all other European and US banks who might want to operate in the UK retail market, perhaps by snapping up A&L, B&B or even NR itself – have now been put at a significant competitive advantage. Knowing how the ECB will behave in a liquidity crisis, they now know they need to maintain less liquidity than their UK peers and can therefore use their capital more efficiently.
But, from a BoE view, of course, the NR cock-up has been self-defeating. No major bank operating in the UK market will ever allow itself to be totally reliant on the BoE again. They’ll make sure they can also draw on funds from the ECB, the Fed and/or other central banks. Presumably they need to retain a relationship with the BoE if they want to offer banking services in the UK, but they will rely on this as little as possible. The BoE will become marginalised. Hmm, maybe I’ll see the day when I buy my UK daily paper with euros.
Unless, of course, the BoE lets everyone know that it has learnt lessons from the liquidity crisis, and will take specific actions – working in concert with other central banks as central banks should, or they’re not really central, are they? . Scapegoating Northern Rock makes it more, not less difficult to calmly identify what mistakes were made by who, and what policy adjustments should be made by whom. And, of course, so does reappointing Mervyn King. Perhaps we should start calling the BoE the UK’s peripheral bank.
Postscript (1) : An article in the Telegraph this morning shows exactly how small UK banks (and building societies) are being penalised by having to use a back-door (larger UK banks with a direct relationship with the ECB) to access liquidity in the euro which is unavailable in sterling. Of course, the British consumer will ultimately pay for this. The Telegraph reports that: “Bankers said the fact that UK lenders were having to access the ECB through the back door exposed failures at the Bank of England.” Quite.
Postscript (2): And the Guardian notes that “… mortgage experts are trying to predict the winners from the credit crunch and concluding that Abbey could come out on top because of the funding available to its Spanish parent, Santander, through the European Central Bank.” Surprise, surprise.