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Run on Northern Rock, the

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  • C. A. E. Goodhart

Abstract

On September 14, 2007, Northern Rock, a medium-sized bank specialising in residential mortgages, suffered the first substantial run of retail depositors in the UK since the 19th century. It had previously adopted a policy of fast growth, largely financing itself by borrowing in wholesale markets and by securitisation. When the financial crisis struck in August, the wholesale funding markets closed to it and it could not get a further securitisation financed; so it became massively illiquid. The Financial Services Authority (FSA) had been focussing primarily on NR’s compliance with the Basel II capital adequacy requirement, and had been remiss in assessing the risks inherent in its overall business plan. After an unsuccessful review of alternative rescue policies, the authorities felt that a massive emergency loan from the Bank of England was the least bad alternative; closure would have probably led to contagion to other, similarly placed, banks. Unfortunately the news of the emergency lending leaked prematurely, and its interpretation in the media helped to trigger the run. The run was not stopped until the following Monday when the Chancellor of the Exchequer stepped in to guarantee all NR deposits, and then to provide 100% deposit insurance to all other banks as well.

Suggested Citation

  • C. A. E. Goodhart, 2011. "Run on Northern Rock, the," The New Palgrave Dictionary of Economics, Palgrave Macmillan.
  • Handle: RePEc:pal:dofeco:v:5:year:2011:doi:3850
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    More about this item

    Keywords

    bank run; emergency lending; financial supervision; deposit insurance; wholesale funding; securitisation;

    JEL classification:

    • 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
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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