Media Standards Trust

For 4 days after the BBC’s Robert Peston broke the news that Northern Rock had requested emergency funding from the Bank of England, coverage of desperate savers dominated newspapers and bulletins. But has the media simply documented the panic or added to it? Is it the media’s job to keep people calm? What role should the media play in a financial crisis?

1 Comments

How did the crisis start?

Reliant on wholesale money markets to finance three-quarters of its mortgage lending Northern Rock found itself unable to service its short-term debts when inter-bank lending froze. As a last resort, it asked the Bank of England for a loan and – because it was a problem of liquidity rather than solvency – the Bank agreed. The request was the first of its kind since the Bank of England became independent of the government and took on the role of “lender of last resort" (from FT.com)

 

Breaking the news or triggering a panic?

News first broke that Northern Rock had made its unprecedented request for emergency funding from the Bank of England on the evening of Thursday 13th September (for details of the ‘scoop’ see the FT’s blog).

The following morning, believing their savings to be at risk, thousands of Northern Rock customers flocked to the banks’ branches to withdraw their money. News outlets responded by amplifying the public’s concerns. The Daily Mail asked ‘How safe is our money?’ and the Express talked alarmingly about a 'Bank panic'. By Saturday there was a full scale run on the bank.

Should the media have been more careful about how it broke the news?

 

Pictures of long queues and frightened pensioners at Northern Rock

Neither the television news nor the newspapers were able to resist the temptation to headline their reports with snaking queues outside Northern Rock branches. The Sunday Telegraph even managed to capture a grey-haired scrum outside one branch office. The Independent reported that there was ‘Panic on the streets of Britain’, although the Telegraph’s description of ‘A British crisis in sensible shoes’ was probably more accurate.

The extensive coverage led some people, against their better judgment they said, to join the lines. 66 year old Jacqueline MacDonald, for example, told the Telegraph that she had no intention of withdrawing her money on Friday “until she saw the huge queues outside her branch”.

Would the queues have been shorter had the media been less fascinated by them?

 

Smothering or stoking the flames?

Many outlets speculated on whether Northern Rock’s troubles would spread. ‘Who’s next?’ asked the Daily Mail, and pointed to three more major lenders. ‘Banking crisis: the fear spreads’, the Independent warned, while the Telegraph noted how ‘Banks’ shares dive on fear of contagion’.

The Alliance and Leicester, whose shares lost a third of their value on Monday, could see no reason why the panic should spread, and believed investors were behaving irrationally. ‘We know of no reason why our share price has fallen so sharply today’ a spokesman told the Daily Mail, ‘We have not approached the Bank of England for assistance’.

The press also speculated about the broader ramifications of the Northern Rock crisis. The Sunday Times asked if this could be ‘the beginning of a repeat of the housing crash of the early 1990s?’ Though The Times predicted that ‘Growth may fall, but no need to fear the ‘R’ word’ [recession].

 

Enough explanation?

Despite general agreement about the gravity of the crisis and plenty of interviews with anxious queuers, most news outlets favoured shorthand explanations rather than lengthy exegeses.

Phrases like ‘credit crunch’ and ‘worldwide squeeze on credit’ were used to indicate why Northern Rock could not fund its short term loans. Many referred to the international fall-out of the failure of the US sub-prime mortgage market. Few, however, explained whether Northern Rock’s problems were a consequence of bad money management or just bad luck, or whether either of these was symptomatic of other lenders.

This was partly, some papers said, because no-one knows. Writing in the Telegraph the Professor of Applied Economics at the Cardiff business school wrote that ‘what seems to have gone wrong is a failure of information in a rapidly developing financial environment’. The Guardian preferred to call it a problem of asymmetric information. ‘Financial management is the new witchcraft’, Max Hastings wrote – is it the media’s job to break the spell?

 

A failure of government communication?

“The PR [public relations] of all concerned has been extraordinarily bad” Douglas McWilliams of the CEBR told the Daily Mail. McWilliams was referring particularly to the reticence of Mervyn King, the Governor of the Bank of England, to soothe savers’ anxieties, and to the failure of Alistair Darling to calm peoples’ nerves – despite numerous media appearances. David Cameron was quick to criticise both the government’s financial policies. Writing in the Sunday Telegraph the opposition leader asked if the government should ‘have required more transparency from banks’. The government eventually stepped in to guarantee all savings held at the Northern Rock.

Would the government have taken this action without the frantic coverage by the media?

 

Should news organisations try to calm the public during a financial crisis?

On the BBC Editors’ Blog Peter Horrocks, head of BBC TV news, said the Corporation was well aware of the ‘risk of causing depositors to panic and withdraw their funds’. For this reason the BBC ‘needed to ensure we broke this dramatic news in a responsible fashion. And… needed to explain the causes of the crisis in a way that audiences unfamiliar with financial markets would understand’
It is not the BBC’s job, Horrocks wrote, to keep people calm or advise them what to do. The Corporation should give people the reassurances of the authorities and rely on its correspondents to tell the public whether ‘those reassurances are legitimate’.

Libby Purves’ took this even further and, writing in The Times, advised journalists and the public to ignore the mollifying words of bankers and financial experts and ‘panic all we like, thanks’.

This dilemma - what role the media should play during a financial crisis - ‘goes to the heart of both the debate about the problems thrown up by journalistic neutrality and/or objectivity, and the debate about the meaning of the public interest’ (Roy Greenslade, The Guardian).

 

Has the media informed or inflamed the crisis surrounding Northern Rock?

Tell us what you think

Bank turmoil is as easy to generate as fire – and few headlines on the major newspapers are just the fuel.

When these things happen usually there are two options: either you leave things on their own and wait and see – this usually results in more contagion and in the closing down of bad-behaving financial institutions; or the Central Bank can intervene as a Lender of Last Resort rescuing 'illiquid' but potentially 'solvent' institutions.

In this second scenario – which is the rule in healthy but temporarily illiquid financial markets — the Central Bank injects the liquidity needed to avoid a potential default of the banks at risk. And since banks are just temporarily illiquid there is no reason why depositors have to rush to claim back their money.

So why we are facing with the threat of a bank panic? Why, despite such massive and reassuring intervention from the big players - the Bank of England - are depositors so scared? The reason is not difficult to find. Surfing on the net almost all major headlines on British and world-wide newspapers are now disclosing worrying numbers.

Just yesterday, some of the most influential newspapers in the UK reported that one of the possible next targets of the depositors' run could be Alliance and Leicester. And from reading the news we learn that the bank has around £23 billion on its books in deposits from current account and savings customers. However it has loaned out £ 40 billion in mortgages.

As depositors we are learning from a newspaper that our bank where all our life-time savings are held is not jut 'illiquid' but potentially 'insolvent'. The bank long-term lending is almost twice its short-term borrowing. And in some other cases, as for Northern Rock, banks did not hesitate borrowing even shorter -at the interbank market- to finance mortgage lending.

It is obvious that any informed but not so naive depositor will soon realize that behind the claim of illiquidity there maybe a sign of insolvency. And as in the case of A&L this is backed up by a fall of shares of almost 50% in the last few months.

So the main concern is that this piece of news should have informed the Central Bank but not millions of individuals who may overreact especially if the information is disclosed at this crucial stage.