Monday, December 17, 2007

The banks’ fear of lending is justified

This crisis is no longer a simple problem of liquidity

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.

Posted by drewster @ 12:56 AM (742 views)
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2 thoughts on “The banks’ fear of lending is justified

  • Also spotted an article in the Times not really directly related to HPC but probably of interest to regular HPC readers:
    Times: Plenty of oil left in the global tank – by our reliable friend David Smith who only recently asserted that house prices never fall. In this latest article noshbag tells us that the world isn’t running out of oil, there’s plenty left, we’ll be fine. Based on his past reliable forecasts, I think it’s time to get a bicycle….

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  • (apologies for commenting my own post)

    If you find it hard to understand the difference between liquidity and solvency, then try this article written in plain english:
    New York Times: After the Money’s Gone

    It’s actually quite an important distinction for the future of our banking system!

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