The period from Friday 14 September 2007 to
Monday 17 September saw the first run on the retail deposits of
a United Kingdom bank since Victorian times. We analyse the causes
and consequences of the run on Northern Rock, and the lessons
to be learnt from it. We emphasise the advantages of legislative
change on a cross-party basis and make proposals for such change,
and for reforms of the Tripartite arrangements, on that basis.
Northern Rock and its regulation
The directors of Northern Rock were the principal
authors of the difficulties that the company has faced since August
2007. The directors pursued a reckless business model which was
excessively reliant on wholesale funding. The Financial Services
Authority systematically failed in its regulatory duty to ensure
that Northern Rock would not pose a systemic risk.
Handling the support operation and stopping the
The Chancellor of the Exchequer was right to view
Northern Rock as posing a systemic risk to the financial system
and to authorise the Bank of England's support facility. However,
the Tripartite authorities did not prepare adequately for that
support operation. Those authorities and Northern Rock ought to
have strained every sinew to finalise the operation and announce
it within hours rather than days of the decision to proceed with
the operation. The Tripartite authorities at deputies level failed
to plan in advance for the announcement of the Government guarantee
on Northern Rock deposits that proved necessary to stop the run.
Dealing with failing banks
We recommend a series of measures for handling 'failing'
banks in an orderly manner and in a way that insulates taxpayers
and small depositors from the risk of banks failing. We recommend
that a relevant authority be given power to acquire information
relating to individual financial institutions and to take action
in relation to an institution in specified circumstances. We also
propose a special resolution regime for failing banks to enable
smooth administration of such a bank to be combined with arrangements
to ensure that insured deposits are safe and accessible.
A deposit protection scheme must be simple and transparent.
The "co-insurance" model of deposit protectionwhereby
small depositors stand to lose some of their money in the event
of a bank closingis discredited. Ensuring the speedy release
of funds under any scheme is of critical importance, and we propose
measures to provide for this. We recommend the establishment of
a Deposit Protection Fund to be funded by participating institutions.
There was a significant failure of the Tripartite
arrangements in September 2007, and lessons must be learned from
that failure. The financial system in the United Kingdom would
not be well-served by a dismantling of the Tripartite arrangements.
However, the current arrangements lack a clear leadership structure
or a strategy for effective communication with the public.
A single authority ought to be given the new powers
for handling failing banks, together with responsibility for the
Deposit Protection Fund. There is a need for 'creative tension'
within the regulatory system, and so these powers and responsibilities
should not be granted to the Financial Services Authority. We
propose the creation of a new post of Deputy Governor of the Bank
of England and Head of Financial Stability. We set out how this
new post and the accompanying Office will relate to the existing
responsibilities of the Bank of England and to the other Tripartite