Abstract
In August 2007, the UK experienced its first bank run since 1866. Northern Rock had adopted a business model (heavy reliance on securitization and wholesale market funding) that exposed itself to a low-probability-highimpact (LPHI) risk. The chapter argues that it was an accident waiting to happen in that there were fundamental fault lines in the institutional architecture for dealing with failing banks in the UK. In particular, there was an inconsistency in the deposit protection scheme, no special insolvency arrangements for dealing with failing banks, and no ex-ante Resolution procedure. There were also serious failings in the supervision of Northern Rock, and in the split of responsibilities between the Treasury, Bank of England, and the Financial Services Authority (FSA).
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
References
Bagehot, W. 1873. Lombard Street: A Description of the Money Market. London: Henry S. King.
Bank of England. 2007a. Turmoil in financial markets: What can central banks do? Evidence to House of Commons Treasury Committee, London, 12 September.
Bank of England. 2007b. Financial Stability Report. London, October.
Bliss, R., and G. Kaufman. 2006. US corporate and bank insolvency regimes: An economic comparison and evaluation. Virginia Law & Business Review 2, no. 1, Spring, 143–77.
BBA. 2007. The Credit Crunch: Implications and Changes Required. London, October.
Carmichael, J., Alexander Fleming, and David T. Llewellyn. 2004. Aligning Financial Supervisory Structures with Country Needs., Washington D.C.: World Bank Institute.
Chick, V. 2008. Could the crisis at Northern Rock have been predicted?: An evolutionary approach. Contributions to Political Economy 27, no. 1, May, 115–24.
Eisenbeis, R., and G. Kaufman. 2007a. Why a run on Northern Rock but not countrywide. Wall Street Journal, Economics blog, http://blogs.wsj.com/economics/2007/10/18/why- a- run- on- northern- rock- but- not-countrywide/(accessed October 18).
—. 2007b. If Northern Rock had been in the US. American Banker, December 14, 2007, 11.
FSA. 2007. Evidence on Northern Rock to the House of Commons Treasury Committee, October.
Goodhart, C. A. E. 2007. Liquidity risk management. LSE mimeo.
—. 2008. The regulatory response to the financial crisis. CESifo Working Paper Series No. 2257. (March). Available at SSRN: http://ssrn.com/abstract=1113002.
Goodhart, C. A. E., Philip Hartmann, David Llewellyn, Liliana Rojas-Suarez, and Steven Leisured. 1999. Financial Regulation: Why, How and Where Now? London: Routledge.
Hamalainen, P., A. Pop, M. Hall, and B. Howcroft. 2008. Did the market signal impending problems at Northern Rock?: An analysis of three financial instruments. Paper presented at the WEAI Annual Conference, Hawaii, June.
Healey, J. 2001. Financial stability and the central bank: International evidence. in Financial Stability and Central Banks, ed. Richard Brealey, et al. London: Routledge.
—. 2007. Banking Reform—Protecting Depositors. Discussion paper. October, London.
—. 2008. Financial stability and depositor protection: Strengthening the framework. Cm 7308, January, London.
Herring, R. 2007. Resolution strategies: Challenges posed by systemically important banks. Lecture at Regional Seminar on Financial Crisis Management, Singapore, September.
Kaufman, G., and M. Seelig. 2006. Post resolution treatment of depositors at failed banks: Implications for the severity of banking crises, systemic risk, and too big to fail. Economic Perspectives (Federal Reserve Bank of Chicago), Second Quarter, 27–41.
Llewellyn, D. T. 2004. Institutional structure of financial regulation and supervision: The basic issues. In Aligning Financial Supervisory Structures with Country Needs, ed. J. Carmichael, Alexander Fleming, and David Llewellyn, chap. 2. Washington D.C.: World Bank Institute.
Luna-Martinez, J., and Thomas A Rose. 2003. International survey of integrated financial services supervisors. Policy Research Working Paper, 3096, World Bank, Washington, July.
Masciandaro, D. 2003. Central banks and single authorities: A delegation puzzle. Milan: Bocconi University.
Mayes, D., and G. Wood. 2008. Lessons from the Northern Rock episode. Paper presented at the WEAI Annual Conference, Hawaii, June.
Oosterloo, S., and Jacob de Haan. 2003. A Survey of International Frameworks for Financial Stability. Occasional Studies 1, no. 3. Amsterdam, De Nederlandsche Bank.
The Economist. 2007. Credit markets. August 4.
Treasury Committee. 2008. The run on the Rock. The Stationary Office, London, HC 56–1. Fifth report of the House of Commons’ Treasury Committee, session 2007–08, January.
Editor information
Copyright information
© 2009 Robert R. Bliss and George G. Kaufman
About this chapter
Cite this chapter
Llewellyn, D.T. (2009). The Northern Rock Crisis: A Multidimensional Problem Waiting to Happen. In: Bliss, R.R., Kaufman, G.G. (eds) Financial Institutions and Markets. Palgrave Macmillan, New York. https://doi.org/10.1057/9780230103245_5
Download citation
DOI: https://doi.org/10.1057/9780230103245_5
Publisher Name: Palgrave Macmillan, New York
Print ISBN: 978-1-349-38193-7
Online ISBN: 978-0-230-10324-5
eBook Packages: Palgrave Economics & Finance CollectionEconomics and Finance (R0)