Friday, September 14, 2007

Northern Rocked

The recent difficulties of Northern Rock have raised interesting questions about the future of the financial sector in Ireland. The sector has seen a number of new entrants in recent years - most competing on the basis of lower loan rates, higher savings rates or convenient online-only services. Though some of these entrants have made some inroads into the market in particular niches (e.g.: credit cards, mortgages, deposit accounts) the main incumbents have not seen their market shares decline in terms of mainstream current account banking.

The question arising from Northern Rock is: 'will we see a flight to quality'? Will (usually conservative) Irish banking customers decide to re-direct their savings and investments towards the traditional players? After all, at some stage some Central Bank somewhere is going to make an example of a financial institution 'pour encourager les autres'. Indeed, one influential economist has called on Bank of England to do just that with Northern Rock:
"... it is hard to argue that the survival of Northern Rock is necessary to avoid a genuine threat to the stability of the UK financial system, or to avoid a serious disturbance to the economy. The bank is not ‘too large to fail’. As the fifth largest mortgage lender in the UK, it is not systemically significant."

Though the Bank has clearly decided to ignore his advice for now, time will tell if similarly benign treatment will be extended to other financial institutions that suffer 'liquidity problems'. Indeed some of the customers of such institutions (in Ireland, the UK or USA) might just decide to act before their Central Banks and avoid their own liquidity crunch. Good news for banking's bigger boys it would seem.

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