THE HAGUE (Reuters) - Complete transparency is not always beneficial when banks suffer a crisis, as the example of Northern Rock shows, Dutch central bank governor and ECB policymaker Nout Wellink said on Wednesday.
“The bank run (on Northern Rock) followed immediately after the announcement of emergency liquidity support,” he said in a statement prepared for a parliamentary hearing on the credit crisis.
Wellink, who sits on the European Central Bank’s Governing Council, also said Dutch banks’ exposure to subprime assets was limited compared with international investment banks’, but that they could be hit if the turbulence persisted or spread to the broader economy.
Northern Rock, which was Britain’s fifth-biggest mortgage lender at its height, requested emergency help from the Bank of England last September, in a move that sparked the first run on a British bank in over a century.
The ECB has intervened heavily in euro zone money markets since then, but none of this was tantamount to bailing banks out, Wellink said.
“They were not meant as rescue operations for potentially fragile banks but were primarily meant to restore the trust in the functioning of the money market,” he said.
Central banks had succeeded in bringing short-term money market rates back to the intended levels, he said. But longer-term financing conditions remained tight due to the large demand for liquidity and perceptions of counterparty risk.
“It is primarily the task of market parties themselves to tackle the underlying causes of the turbulence,” Wellink said.
Problems at Northern Rock and on the euro zone money market were sparked by European banks’ exposure to U.S. mortgage lending to subprime borrowers who turned out to have little prospect of keeping up repayments.
Wellink said the problems were long-standing and that U.S. supervision of the sector had proven to be inadequate.
The subprime mortgage problems have been a major driver of an economic slowdown in the United States, which has caused the Federal Reserve to cut interest rates and pushed the dollar to an all-time low against the euro.
But Wellink sought to play down the significance of this for the euro zone.
“The dollar rate has to be weighted for trade flows, there are aspects of differences in inflation,” he said. “You have to look at the real rate. Then you have to state the development is much less extraordinary than it seems if you just look at that one euro/dollar figure.”
Separately, he added that investments in Western banks by sovereign wealth funds from the Middle East and Asia could have a stabilising effect, but cautioned that the funds should be closely monitored due to their strong ties to governments.
U.S. banks Citigroup and Merrill Lynch have both accepted cash injections from sovereign wealth funds to bolster balance sheets hit by subprime losses.
Reporting by Harro ten Wolde and Niclas Mika; editing by David Stamp