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The Failure of Northern Rock - A Multidimensional Case Study

edited by Morten Balling, Franco Bruni and David T. Llewellyn, Vienna, 2009

ISBN 978-3-902109-46-0
In August 2007 the United Kingdom experienced its first bank run in over 140 years. Although Northern Rock was not a particularly large bank (it was at the time ranked 7th in terms of assets) it was nevertheless a significant retail bank and a substantial mortgage lender. In fact, ten years earlier it had converted from a mutual building society whose activities were limited by regulation largely to retail deposits and mortgages. Graphic television news pictures showed very long queues outside the bank as depositors rushed to withdraw their deposits. There was always a fear that this could spark a systemic run on bank deposits. After failed attempts to secure a buyer in the private sector, the government nationalised the bank and, for the first time, in effect socialised the credit risk of the bank. It is now a fully state-owned bank.
Since then, another British bank (Bradford and Bingley – which was also a converted building society) has also been nationalised. Furthermore, the government has since taken substantial equity stakes in several other British banks as part of a general re-capitalisation programme. Of course, since Northern Rock failed the world has experienced what is arguably its most serious financial crisis ever and in the US much larger and more significant banks have failed. On the face of it, therefore, the Northern Rock crisis pales into insignificance within the global context. Nevertheless, the Northern Rock is particularly significant because it represents in a single case study virtually everything that can go wrong with a bank. As we argue in the first essay in this compendium, it was a multi-dimensional problem. For this, and other reasons, it will surely become a much-analysed case study in bank failure. It is also for this reason that the Editorial Board of SUERF decided to invite a selected group of eminent scholars to write short essays on what they judge to be some of the significant issues raised in the Northern Rock case study. We were anxious to ensure that the authors would not be exclusively from the United Kingdom and of the thirteen contributors, six are from outside the country including perspectives from the United States and Italy. All of the authors were given a completely free hand to select their own focus and no attempt has been made to coordinate or edit the contributions. The lessons to be learned are far from being exclusive to the United Kingdom. This is why the Editorial Board of SUERF has devoted this SUERF Study to this important episode in the history of bank failures.

The Northern Rock Crisis: a multi-dimensional Problem
David T. Llewellyn

The Northern Rock Crisis in the UK
David G Mayes and Geoffrey Wood

Fallout from the credit squeeze and Northern Rock crises: Incentives, transparency and implications for the role of Market discipline
Paul Hamalainen

Lessons from the Demise of the UK’s Northern Rock and the U.S.’s Countrywide and IndyMac
Robert A. Eisenbeis and George G. Kaufman

Northern Rock: Just the tip of the Iceberg
Marco Onado

Blurring the Boundaries in Financial Stability
Michael W. Taylor

Northern Rock and banking law reform in the UK
Rosa M Lastra

The Regulatory Response to the Financial Crisis
Charles A E Goodhart

Can central bank provision of market liquidity create a problem of moral hazard?
Alistair Milne

The Northern Rock affair: an analysis of the ‘teaser rate’ strategy
Tim Congdon

Additional Info
Keywords: Northern Rock, retail banking, mortgages, nationalisation, bank failure, United Kingdom, LPHI risk, lender of last resort, deposit insurance, market discipline, Countrywide, IndyMac, United States, deposit guarantees, supervisory failure, bank regulation, return on equity, business model, securitisation, financial regulation, financial stability, crisis management, banking law, insolvency, emergency liquidity assistance, cross-border bank insolvency, moral hazard, penalty rates, teaser rates, capital-asset ratios, Basel I, Basel II
JEL Codes: D14, D18, D4, E21, E5, E51, E53, E58, G18, G2, G21, G28, G32, G33, G34, G38, K2, L1, L5, L51
ISBN No.: 978-3-902109-46-0
Authors: Tim Congdon; Charles A.E. Goodhart; Robert A. Eisenbeis and George G. Kaufman; Paul Hamalainen; Rosa M. Lastra; David T. Llewellyn; David G. Mayes and Geoffrey Wood; Alistair Milne; Marco Onado; Michael Taylor
Editors: Morten Balling, Franco Bruni and David T. Llewellyn

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