It may be too early for sweeping statements but the news this month that Northern Rock is to open its doors once more to new borrowers is a step in the right direction.
The goverment acquired Northern Rock last February amid widescale criticsm because it was using tax payers money to pay for the nationalisation at a cost of over £80 billion. However our view at the time was that the Chancellor was left with no option but to act to try and preserve the UK banking system, as N.R customers made a run on its reserves. Northern Rock was then instructed to take on no new business and to encourage its existing customers to re-mortage elsewhere if their current deal was ending with them.
Meanwhile despite injecting more tax payers money into the banking system, the lenders still weren’t lending. In September 2008 Bank of England governor Mervin King criticised the idea of a possible public mortgage bank as a solution to the lending difficulties. Well now it’s happenning with annoncement by chancellor Alistair Darling that the N.R plans to develop its mortgage business with up to £14bn in new loans. The restructured RBS will also be making £25bn available, £9bn in mortgages and £16bn for business lending.
The purpose is to try to kickstart the economy again and to encourage lending. We think this is positive and assuming it works, the profits can start paying back the public money which was used to keep it trading.
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