The sub-prime crisis, the credit squeeze and Northern Rock: The lessons to be learnt
AbstractOn 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 nationalised in February 2008. Inevitably, post mortems ensued, the most transparent of which was that conducted by the all-party House of Commons' Treasury Select Committee. 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 which precipitated the bank's illiquidity. This article briefly explains the background to these extraordinary events before setting out, in some detail, the tensions and flaws in UK arrangements which 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.
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Bibliographic InfoPaper provided by Department of Economics, Loughborough University in its series Discussion Paper Series with number 2008_09.
Date of creation: Aug 2008
Date of revision: Aug 2008
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UK banks; banking regulation and supervision; central banking; deposit protection.;
Other versions of this item:
- Maximilian J.B. Hall, 2008. "The sub-prime crisis, the credit squeeze and Northern Rock: the lessons to be learned," Journal of Financial Regulation and Compliance, Emerald Group Publishing, vol. 16(1), pages 19-34, February.
- E53 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Deposit Insurance
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-09-29 (All new papers)
- NEP-BAN-2008-09-29 (Banking)
- NEP-CBA-2008-09-29 (Central Banking)
- NEP-FMK-2008-09-29 (Financial Markets)
- NEP-HIS-2008-09-29 (Business, Economic & Financial History)
- NEP-MAC-2008-09-29 (Macroeconomics)
- NEP-REG-2008-09-29 (Regulation)
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2008_07, Department of Economics, Loughborough University, revised Aug 2008.
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