Lessons of Northern Rock

The paper - written by Alistair Milne and Geoffrey Wood, both UK academics at Cass University in London - considers why the traditional techniques for the maintenance of banking stability failed, if they in fact did, and then looks at what needs to change to prevent a reoccurrence.

"Britain was lucky in how the Northern Rock affair worked out," the research concludes as the run was on a relatively small bank and the run did not spill over into other banks.

They propose three policy measures:

• arrangements for prompt and orderly closure of a bank as it approaches problems, before it would otherwise be forced to close by either insolvency or illiquidity;
• reform of deposit insurance, such that whatever sum is guaranteed is completely guaranteed, and can be accessed without any significant delay; and
• customers retain access to all core banking services either through speedy transfer of all accounts or the continued operation in some guise of the troubled bank.

Click here to read the paper