The Northern Rock Crisis: A Multidimensional Problem Waiting to Happen

David T. Llewellyn

Chapter 5 in Financial Institutions and Markets, 2009, pp 101-128 from Palgrave Macmillan

Abstract: 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).

Keywords: Central Bank; Moral Hazard; European Central Bank; Liquidity Risk; Multidimensional Problem (search for similar items in EconPapers)
Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-0-230-10324-5_5

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DOI: 10.1057/9780230103245_5

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