Research Discussion Papers, Bank of Finland
Shattered on the Rock? British financial stability from 1866 to 2007
() and Geoffrey Wood
Abstract: In autumn of 2007 Britain experienced its first bank run
of any significance since the reign of Queen Victoria. The run was on a
bank called Northern Rock. This was extraordinary, for Britain had been
free of such episodes because by early in the third quarter of the 19th
century the Bank of England had developed techniques to prevent them. A
second extraordinary aspect of the affair was that it was the decision to
provide support for the troubled institution that triggered the run. And
thirdly, unlike most runs in banking history, it was a run only on that one
institution. This paper considers why the traditional techniques for the
maintenance of banking stability failed – if they did fail – and then
considers how these techniques may need to be changed or supplemented to
prevent such problems in the future. The paper starts with a narrative of
the events, then turns to banking policy before the event and to the policy
responses after it. We suggest both why the decision to provide support
triggered the run and why the run was confined to a single institution.
That prepares the way for our consideration of what should be done to help
prevent the recurrence of such episodes in the future.
Keywords: bank failure; lender of last resort; money markets; bank regulation; (follow links to similar papers)
JEL-Codes: E42; E58; N24; (follow links to similar papers)
68 pages, December 10, 2008
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