The nationalisation of the banks in a bid to save them was met with much criticism. Cashfloat has a look at the rough time and effects of nationalisation.
- Northern Rock terminated its Danish operation in April 2008.
- By 2009 the media was reporting that Northern Rock was becoming a success story.
The Nationalisation of the Banks
The measures that the UK government undertook to prevent a wholesale collapse of the financial system included the nationalisation of the banks or part nationalisation of several banks. There had been some failed attempts at rescuing Northern Rock Bank when it was found to be unsafe. This was due to a lack of reserves. But the two private buy out proposals did not have sufficient backing. The government thought that savers and investors’ money would still be at risk. There was some opposition to the planned nationalisation of the banks by the shadow Chancellor of the Exchequer. He stated that it was wrong for governments to play a part in decisions about whether to foreclose on mortgages at a time when house prices were dramatically falling. But, after a lengthy discussion the government felt that nationalisation for this bank was the only option.
The Chancellor made this decision and they offered Northern Rock shareholders compensation which was set by an independent panel. However, some of them felt that the chancellor had robbed them of a better deal that would have resulted had the bank had remained in the private sector. Additionally, the nationalisation of the bank inevitably led to some unpopular measures like downsizing and job losses.
What Were the Results of Nationalisation of the Banks?
The government became the only shareholder of the Northern Rock Bank. There followed a series of changes in the boardroom. New executives replaced the so called ‘failed bankers’. Although they banned and fined some directors for misrepresenting mortgage arrears data, they took no legal action against the majority of the former board of executives. Thereafter, the government announced a series of measures. They intended for it to make a big reduction in the government debt within the next 4 years. These included substantial job losses and a rationalisation of the business. By September 2008 the bank was on its way to repaying the loan from the government. There was also a sell off of mortgage assets to other lender. But the most far reaching measure taken about Northern Rock was the reduction of the number of mortgages offered to existing and new customers.
What happened to the Northern Rock?
Northern Rock terminated its Danish operation in April 2008. And, in June, Lloyds Bank took over a proportion of its mortgage book. The bank continued to be a sponsor for Newcastle United. However, the partially built 10 story tower block that for new offices were put up for sale or lease to a third party. They took this decision as it was now surplus to the capacity needed for the new slimmed down bank. There were some legal proceeding started by two hedge funds regarding the appropriateness of nationalisation as well as an appeal by shareholders about the level of compensation they had received. Both hedge funds lost these legal cases.
In October 2008 there were accusations that the new nationalised bank was being too aggressive about mortgage arrears. People complained about being kicked out of their homes. But, at the same time banks renewed confidence and many people opened new accounts. And, by January 2009 the Chancellor stated that the bank would not carry on shrinking but would begin appropriate lending by issuing more mortgages to creditworthy clients. A government loan partly financed the new lending.
The Turnaround of Northern Rock
By 2009 the media was reporting that Northern Rock was becoming a success story. The strategy of the bank had changed. Whereas they used to positively encourage borrowers to look elsewhere once they cleared their mortgage, they now issued good deals for borrowers once again. 2010 saw the end of the government’s 100% guarantee of savers deposits as the bank returned to normality and the Financial Services Compensation Scheme limit of £50,000 per customer account was put into place.
There were several interested buyers for Northern Rock once the bank had regained stability and deemed profitable. The potential buyers included Tesco, Santander, Blackstone and Virgin. After a flurry of speculation, bids and counter bids, the bank was eventually sold to Virgin Money in November 2011. The business made an initial payment of £747 million followed by up to £280 million over the next couple of years. This deal did represent an overall loss for British taxpayers but people felt that it was the best that the government could do.
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