Loans warning 10 years after collapse of Northern Rock.

Comment marks 10 years since Northern Rock collapse

The boss of Virgin Money has warned that cheap personal loans could pose a threat to the financial system as the banking sector marks 10 years since the collapse of Northern Rock.

Jayne-Anne Gadhia said personal unsecured loans were priced too low for a good economy “let alone one that might have an uncertain outlook” and called for regulators to keep a watchful eye on the car finance market.

Her comments come alongside the 10-year anniversary of Northern Rock’s collapse, which saw the lender become a symbol of the financial crisis in the UK and crash into Government ownership.

The chief executive – who oversaw Virgin Money’s takeover of Northern Rock’s “good” operations in 2010 – told the Press Association: “I would say that in the UK the car finance market is the area that should be watched.

“The chief executive of Lloyds was quoted at the half-year results saying the Bank of England is concerned about credit growth, but we don’t see that on banks’ balance sheets.

“That is because there is so much growth on car manufacturers’ balance sheets and I think that is quite a difficult conundrum for the regulators.

“The other area I find concerning, and Virgin Money are not in this, is personal unsecured loans that people might take out for a new kitchen or conservatory.

“The pricing on those loans is very low. I saw a pricing chart only last week and they are being priced at about 3%.

“I would say that probably there is an issue there that the price of unsecured loans is not pricing in the real risk of how they might perform in a good economy, let alone in one that might have an uncertain outlook.”

Bank customers sparked a run on Northern Rock in 2007 after the lender’s over-reliance on the wholesale markets, as opposed to customer deposits, left it dangerously exposed when the subprime mortgage crisis struck the US.

Lengthy queues formed at cash points and shares in the bank tanked, as it entered a full-blown liquidity crisis that forced Gordon Brown’s Labour Government to ensure its future by taking it into public hands in February 2008.

The move paved the way for Northern Rock to be split into a good and bad bank in January 2010, with Virgin Money taking over its “good” operations, including 75 branches, a £14 billion mortgage book and £16bn retail deposit book.

Adecade ago huge queues began to form outside branches of British bank Northern Rock.

It was the start of a quite extraordinary, tumultuous time.

Marking the dawn of a crippling economic downturn, even now we are struggling to emerge from the dark shadows cast around that time.

There cannot be a family, charity, business or individual who has not been touched by the crisis in some way, shape or form.

Policies of austerity became the norm as the world struggled to adapt to the stark new reality.

One might think that, having been so badly affected, lessons would have been learnt. Yet, it appears there are fresh threats on the horizon. Cheap personal loans have become a financial necessity for many, but there are warnings they may yet cripple our fragile financial systems.

The boss of Virgin Money has warned personal unsecured loans are priced too low even for a good economy — “let alone one that might have an uncertain outlook”.

Regulators have now been urged to closely monitor the situation.

It is a timely warning and one those in the financial sector would do well to heed.

Once bitten, twice shy, surely...

Picture: Gordon Robbie. Worried Dundee customers besieged Northern Rock’s branch on High Street in 2007, with many hoping to withdraw all their savings.