The Subprime Crisis, the Credit Squeeze, and Northern Rock: The Lessons To Be Learnt

Abstract

On 14 September 2007, after failing to find a “white knight” to take over its business, Northern Rock bank turned to the Bank of England (“the Bank”) for a liquidity lifeline. This was duly provided but failed to quell the financial panic, which manifested itself in the first fully blown nationwide deposit run on a UK bank for 140 years. Subsequent provision of a blanket deposit guarantee duly led to the (eventual) disappearance of the depositor queues from outside the bank’s branches but only served to heighten the sense of panic in policymaking circles. Following the government’s failed attempt to find an appropriate private sector buyer, the bank was then nationalized in February 2008. Inevitably, postmortems ensued, the most transparent of which was that conducted by the all-party House of Commons’ Treasury Select Committee. (For a review and personal assessment of its January 2008 report see Hall 2008, pp. 26–32.) And a variety of reform proposals are currently being deliberated at fora around the globe with a view to patching up the global financial system to prevent a recurrence of the events that precipitated the bank’s illiquidity.

This chapter briefly explains the background to these extraordinary events before setting out, in some detail, the tensions and flaws in UK arrangements that allowed the Northern Rock spectacle to occur. None of the interested parties—the Bank, the Financial Services Authority (FSA) and the Treasury—emerges with their reputation intact, and the policy areas requiring immediate attention, at both the domestic and international level, are highlighted. Some reform recommendations are also provided for good measure, particularly in the area of formal deposit protection.

An earlier version of this paper appeared in the Journal of Financial Regulation and Compliance 16, no.1 (March 2008): 19–34. And a full version of this paper is available at the Department of Economics’ (Loughborough University) website (http://www.lboro.ac.uk/departments/ec/Research.htm).