Government ownership of the failed Northern Rock bank could be exacerbating the liquidity crisis, according to New Star economist Simon Ward.
He says the influx of cash received by Northern Rock since nationalisation has caused problems on the interbank lending market, which determines the interest rates on many mortgages.
“Other banks benefited from Northern Rock’s woes last autumn, as savers withdrew funds from the troubled lender and redeposited them elsewhere,” he says.
“Now, the reverse flow is occurring, with savers lured back by attractive rates and government guarantees and Rock’s mortgage borrowers encouraged to refinance with other lenders.”
He says Northern Rock has chosen to funnel the extra cash into repaying its borrowing from the Bank of England, rather than lending it on the interbank market, which would help ease liquidity concerns.
Ward says Northern Rock has paid back around £6bn in loans from the Bank of England, thus reducing the burden on the taxpayer.
The Bank of England’s weekly return suggest the total amount owed by Northern Rock fell from £27bn in January to around £21bn currently.
As a result, Ward says the Bank of England should increase long-term lending to the market to help offset the liquidity being drained by Northern Rock.
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