Risk/reward

We've heard a lot about the downsides of mortage securitization recently: how spreading the risk has also made it difficult for strapped borrowers to obtain workouts, while obscuring the extent of the financial system's exposure. But here's a benefit you aren't hearing much about: no one in America is currently worried about bank runs. In England, on the other hand, where one of the biggest subprime lenders was also a major bank, the government has stepped in to guarantee all of Northern Rock's deposits in order to prevent a solvency crisis for the institution:


News that U.K. Chancellor of the Exchequer Alistair Darling, who oversees the Treasury, together with the Bank of England, had taken the highly unusual step of guaranteeing all deposits at Northern Rock, combined with an unscheduled £4.4 billion ($8.78 billion) injection from the central bank, brought a measure of calm to depositors and investors yesterday. A Treasury spokesman said the guarantee extends to any solvent bank in similar circumstances.

Northern Rock said that lines at its branches and traffic at its call centers had decreased sharply. In London yesterday, Northern Rock's shares rose 8.2% to 306 pence ($6.11), after losing about 30% on each of the two previous trading days. Shares of other U.K. mortgage lenders bounced back sharply as worries eased.
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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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