The sub-prime crisis, the credit squeeze, Northern Rock and beyond: the lessons to be learnt
preprintposted on 13.05.2009, 10:37 by Maximilian J.B. Hall
On 14 September 2007, after failing to find a 'White Knight' to take over its business, Northern Rock bank turned to the Bank of England ('the Bank') for a liquidity lifeline. This was duly provided but failed to quell the financial panic, which manifested itself in the first fully-blown nationwide deposit run on a UK bank for 140 years. Subsequent provision of a blanket deposit guarantee duly led to the (eventual) disappearance of the depositor queues from outside the bank's branches but only served to heighten the sense of panic in policymaking circles. Following the Government's failed attempt to find an appropriate private sector buyer, the bank was then nationalised in February 2008. Inevitably, post mortems ensued, the most transparent of which was that conducted by the all-party House of Commons' Treasury Select Committee. And a variety of reform proposals are currently being deliberated at fora around the globe with a view to patching up the global financial system to prevent a recurrence of the events which precipitated the bank's illiquidity and the wider financial instability which set in towards the end of 2008. This article briefly explains the background to these extraordinary events before setting out, in some detail, the tensions and flaws in UK arrangements which allowed the Northern Rock spectacle to occur. None of the interested parties – the Bank, the Financial Services Authority (FSA) and the Treasury – emerges with their reputation intact, and the policy areas requiring immediate attention, at both the domestic and international level, are highlighted. A review and assessment of both the House of Commons Treasury Committee's Report on Northern Rock and the Tripartite Authorities' proposals for reform are also provided before analysis of the subsequent measures taken to stabilise the UK financial sector – involving further nationalisation of banks, the brokering of takeover rescues of banks and building societies, a £400 billion bailout of the deposit-taking sector and a subsequent bank bailout scheme – is undertaken. Accordingly, this paper represents an update, covering developments until end-January 2009, of my earlier paper on the Northern Rock affair (Working Paper No. WP 2008-09), which was published in September 2008. Specifically, it covers the latest domestic (i.e. UK) developments on a number of fronts. The text, for example, provides updates on the reform proposals of the Tripartite Authorities, amendments to deposit protection arrangements, and the emergency funding initiatives adopted by the Bank of England. Table 2 (where, along with Table 1, most of the new material is located), meanwhile, provides updates and analysis of the following: the latest developments in the UK housing market; the latest developments in the real economy; the latest financial statements of the major banks; the latest nationalisation moves;* the latest inflation figures and interest rate decisions of the MPC; the latest government bailout plans for deposit-takers; the latest official support packages introduced for the housing market, mortgage borrowers and small businesses; the latest fiscal stimulus plans (e.g. as contained in the Pre-Budget Report of November 2008); and the latest domestic financial and regulatory developments. Meanwhile, Table 1 provides up-to-date information on: emergency funding initiatives undertaken by the Fed, the ECB and other major central banks; financial institution takeovers/bailouts in the US and Europe; interest rate developments in the major economies; financial and regulatory developments in the US and Europe; developments in the real economies of the US and Europe; the financial statements of banks in the USA and Europe; the evolution of official bailout plans in the US ('TARP') and Europe; deposit protection developments in the US and Europe; fiscal stimulus packages adopted in the US, Europe and the wider international community; G7/EU plans to tackle the worsening financial crisis; IMF 'bailouts' of beleaguered countries; and the Basel Committee's proposals for revamping Basel II in the light of the crisis. *A more detailed discussion of these developments is provided in Hall (2008).
- Business and Economics