The Failure of Northern Rock: A Multi-Dimensional Case Study
Edited academic volume from SUERF.
Summary
Franco Bruni and David Llewellyn edited this collection for the SUERF financial research network, assembling academic and practitioner analyses of the Northern Rock failure from several disciplinary angles.
The chapters cover the bank's business model and its dependence on securitisation and wholesale funding; the supervisory failure by the Financial Services Authority, which had approved the model and had not tested its funding assumptions; the deposit insurance arrangements, which did not cover balances in full and therefore gave depositors a rational reason to queue; the lender of last resort question and the Bank of England's initial reluctance to lend, including the argument about moral hazard and the effect of publicity requirements; the tripartite regulatory structure and the coordination failure within it; and the resolution options available and why nationalisation was reached.
The volume's collective conclusion is that the failure was one of the regulatory framework as much as of the institution. The specific reforms that followed in Britain, including the special resolution regime, full deposit guarantees up to a limit and the restructuring of supervision, address the failures the contributors identify. The book is academic and assumes familiarity with banking regulation. It is the most complete analysis of the episode available.
Key takeaways 7
- Northern Rock's model depended on continuous access to securitisation and wholesale markets, and supervision had not tested that assumption.
- Deposit insurance that did not cover balances in full gave depositors a rational reason to withdraw, which produced the run.
- The tripartite regulatory structure left coordination failures that no single body had authority to resolve.
- Publicity requirements attaching to emergency liquidity support made confidential lender of last resort assistance impossible.
- Britain had no special resolution regime for failing banks, which left nationalisation as the only alternative to disorderly failure.
- Moral hazard concerns delayed liquidity support in a case where the institution's problem was funding rather than solvency.
- The contributors treat the failure as a regulatory framework failure rather than as an institution-specific event.
Who should read it
Regulators and analysts of banking resolution who want the complete multi-disciplinary analysis of the case that reshaped British bank regulation.
Where it sits in the reference 2
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