COMMENT The Northern Rock crisis still has a long way to run. The bank may well end up in administration or – preferably – in temporary public ownership. There are unresolved issues about the scale of taxpayers’ exposure, the level of security enjoyed by the government on its loans and the soundness, or otherwise, of Northern Rock’s assets.
Not enough attention is being paid to the looming issue of how the UK banking system – and Northern Rock in particular – would cope with a home-grown version of the US subprime mortgage crisis. So far British banks have been hit only indirectly as a result of the drying-up of wholesale markets and inter-bank lending. Northern Rock’s management, the Financial Services Authority and the government have maintained that the mortgage-based UK assets of the bank – and other banks – are solid. They are understandably preoccupied with avoiding the possibility of drowning in one tidal wave without worrying about a second – potentially bigger – one.
