Monday, December 17, 2007
The banks’ fear of lending is justified
The distinction between illiquidity and insolvency is the next challenge for monetary authorities. Even if Northern Rock could liquidate all its mortgages tomorrow, it could not raise enough money to repay its depositors and the Bank of England in full, because the market prices of mortgage assets are today much lower than 100p in the pound. This downward revision of asset values forces banks to rein in their lending even more. As a result, the summer liquidity crisis has turned into a loss of confidence in the solvency of the banks.