Financial innovations and crises: The view backwards from Northern Rock

doi:10.1017/CBO9780511757419.002

1 - Financial innovations and crises: The view backwards from Northern Rock

Published online by Cambridge University Press: 04 August 2010

Jeremy Atack

Edited by

Jeremy Atack and

Larry Neal

Show author details

Jeremy Atack: Affiliation:
Vanderbilt University, Tennessee
Larry Neal: Affiliation:
University of Illinois, Urbana-Champaign

Book contents

Get access

Summary

On September 17, 2007, the UK experienced its first bank run in over 140 years. Early that morning, nervous depositors all over the UK began queuing outside their local branches of Northern Rock bank to redeem their deposits (often their life savings) while the bank still had the cash to meet their demands. They had heard the reassuring words over the preceding weekend from Bank of England Governor Mervyn King, including the announcement that the Bank had extended a $4.4 billion line of credit, and they were worried. British deposit insurance rules limited full coverage to just the first £2,000 of a deposit and only 90 percent of the balance up to the insurance cap of £35,000. As a result, many depositors had substantial sums at risk. The run ended only when the Chancellor of the Exchequer, Alistair Darling, overruled the British regulator of banks, the Financial Services Authority, by suspending deposit insurance rules and promising unlimited 100 percent coverage to all existing depositors in the bank as of midnight, Wednesday, September 19, 2007 for the duration of the crisis. Nevertheless, as 2008 began, the crisis was still on-going with no end in sight. As of mid-December 2007, the Bank of England and the British taxpayers had extended at least £25 billion in credit to the bank (about $50 billion) but Northern Rock depositors have continued to withdraw their funds. There were even ministerial discussions about whether or not to nationalize the bank to protect the taxpayers' investment.

Type: Chapter
Information: The Origins and Development of Financial Markets and Institutions
From the Seventeenth Century to the Present
, pp. 1 - 31

DOI: https://doi.org/10.1017/CBO9780511757419.002 [Opens in a new window]

Publisher: Cambridge University Press

Print publication year: 2009

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Book purchase

Temporarily unavailable

References

Athey, S., Atkeson, A. and Kehoe, P.J.. 2001. “On the Optimality of Transparent Monetary Policy,” Federal Reserve Bank of Minneapolis Working Paper 613.

,BBC News, international version. “Northern Rock Besieged by Savers,” September 17, 2007: http://news.bbc.co.uk/2/hi/business/6997765.stm.

,BBC News. “EBC Lends $500bn to Lower Rates,” December 18, 2007.

Bernanke, Ben. “The Subprime Mortgage Market.” Speech to the Federal Reserve Bank of Chicago's 43rd Annual Conference on Bank Structure and Competition, Chicago, Illinois. May 17, 2007: www.federalreserve.gov/newsevents/speech/bernanke20070517a.htm.

Bodenhorn, Howard and Rockoff, Hugh. 1992. “Regional Interest Rates in Antebellum America,” in Goldin, C. and Rockoff, H. (eds.). Strategic Factors in American Economic History: A Volume to Honor Robert W. Fogel. Chicago: University of Chicago Press for NBER: 159–87.Google Scholar

Bruck, Connie. 1988. The Predators' Ball: the Inside Story of Drexel Burnham and the Rise of the Junk Bond Raiders. New York: Simon and Schuster.Google Scholar

Calomiris, Charles. May 1989. “Deposit Insurance: Lessons from the Record,” Economic Perspectives: 10–30.Google Scholar

,CNN Money.com. October 15, 2007. “Banks Seen Readying $100B Bailout. Reports: Citigroup, Others Working with Treasury Department to Protect against Further Securities Collapses.”

Collins, M. 1992. “Overend Gurney Crisis, 1866,” in Newman, P. (ed.). The New Palgrave Dictionary of Money and Finance. London: Palgrave Macmillan.Google Scholar

,Congressional Budget Office. Budget and Economic Outlook, January 2008.

Curry, Timothy and Shibut, Lynn. December 2000. “The Cost of the Savings and Loan Crisis: Truth and Consequences,” FDIC Banking Review, 13(2): 26–35.Google Scholar

Davis, Lance E. September 1965. “The Investment Market, 1870–1914: The Evolution of a National Market,” Journal of Economic History, 25(3): 355–99.CrossRef Google Scholar

Davis, Lance and Gallman, Robert. 2001. Evolving Capital Markets and International Capital Flows: Britain, the Americas, and Australia, 1865–1914. New York: Cambridge University Press.Google Scholar

Gerardo, della Paolera and Taylor, Alan M.. 2001. Straining at the Anchor: the Argentine Currency Board and the Search for Macroeconomic Stability, 1880–1935. Chicago: University of Chicago Press.Google Scholar

Pinto, Isaac. 1774. An Essay on Circulation and Credit. London: J. Ridley.Google Scholar

Demirguc-Kunt, A., Karacaovali, B. and Laeven, L.. April 2005. “Deposit Insurance around the World: a Comprehensive Database,” World Bank, unpublished working paper.

Dreyfus, Jean-Francois, Saunders, Anthony and Allen, Linda. 1994. “Deposit Insurance and Regulatory Forbearance: Are Caps on Insured Deposits Optimal?” Journal of Money, Credit & Banking, 26.CrossRef Google Scholar

,The Economist. November 2, 1996. “Passing on the Risks,” 341, 7990: 73–4.

Eichengreen, Barry. 1992. Golden Fetters: the Gold Standard and the Great Depression, 1919–1939. New York: Oxford University Press.Google Scholar

,FDIC. History of the 80s: Volume I: An Examination of the Banking Crises of the 1980s and Early 1990s. Available online from FDIC at: www.fdic.gov/bank/historical/history/vol1.html.

,Federal Reserve. Bulletin, various issues.

,Financial Times. “Confidence in Northern Rock Collapses,” September 14, 2007

,Financial Times. “Darling Steps in to Halt Bank Run,” September 18, 2007.

Ford, A. G. 1956. “Argentina and the Baring Crisis of 1890,” Oxford Economic Papers, New Series, 8(2): 127–50.CrossRef Google Scholar

Friedman, Milton and Jacobson Schwartz, Anna. 1963. A Monetary History of the United States, 1867–1960. Princeton: Princeton University Press.Google Scholar

Geraats, Petra. March 2002. “Central Bank Transparency,” University of Cambridge Working Paper.

Gillat, Lucien. 2004. La Banque d'Amsterdam et le florin européen au temps de la Republique néerlandaise, (1610–1820). Paris: EHESS.Google Scholar

,Guardian. “Ministers Prepare Plan to Nationalize Northern Rock,” December 14, 2007.

Homer, Sidney and Sylla, Richard. 2005. A History of Interest Rates. Hoboken: Wiley, 4th edition.Google Scholar

,International Herald Tribune. “ECB Gives Banks Another Cash Injection,” August 13, 2007.

,International Herald Tribune. “Crisis Deepens for Northern Rock,” September 17, 2007: www.iht.com/articles/2007/09/17/asia/17northern.php.

James, John A. December 1976. “The Development of the National Money Market, 1893–1911,” Journal of Economic History, 36(4): 878–97.CrossRef Google Scholar

Josephson, Matthew. 1934. The Robber Barons: the Great American Capitalists, 1861–1901. New York: Harcourt, Brace.Google Scholar

Levine, Ross. June 1997. “Financial Development and Economic Growth: Views and Agenda,” Journal of Economic Literature, 35: 688–726.Google Scholar

Levine, Ross. 2005. “Finance and Growth: Theory and Evidence,” in Aghion, Philippe and Durlauf, Steven (eds.). Handbook of Economic Growth. The Netherlands: Elsevier Science.Google Scholar

,Liggett v. Lee, 288 US 517 (1933).

Luzzatto, G. 1963. Il debito pubblico della Repubblica di Venezia. Milano-Varese.Google Scholar

Marshall, John. 1819. Trustees of Dartmouth College v. Woodward, 17 US (4 Wheat.) 518.

Martin, Ron and Turner, David. 2000. “Demutualization and the Remapping of Financial Landscapes,” Transactions of the Institute of British Geographers, 25(2): 221–41.CrossRef Google Scholar

Mason, Joseph. 2001. “Reconstruction Finance Corporation Assistance to Financial Institutions and Commercial & Industrial Enterprise in the US Great Depression, 1932 – 1937,” in Claessens, Stijn, Djankov, Simeon and Mody, Ashoka (eds.). Resolution of Financial Distress. Washington, D.C.: World Bank Press: 167–204.Google Scholar

Mason, Joseph. April 2003. “The Political Economy of RFC Assistance during the Great Depression,” Explorations in Economic History, 40(2): 101–21.CrossRef Google Scholar

Meltzer, Allan H. 2003. A History of the Federal Reserve: Chicago: University of Chicago Press.Google Scholar

Mishkin, Frederic S. October 2004. “Can Central Bank Transparency go too far,” NBER Working Paper 10829.

Munro, John. 1992. Bullion Flows and Monetary Policies in England and the Low Countries, 1350–1500. Hampshire: Variorum.Google Scholar

Mueller, Reinhold C. 1997. The Venetian Money Market: Banks, Panics, and the Public Debt, 1200–1500. Baltimore: Johns Hopkins Press.Google Scholar

Murphy, Antoin E. 1986. Richard Cantillon, Entrepreneur and Economist. New York: Oxford University Press.Google Scholar

Murphy, Antoin E.. 1997. John Law: Economic Theorist and Policy-maker. Oxford: Clarendon Press.

Neal, Larry. Spring 1971. “Trust Companies and Financial Innovation, 1897–1914,” Business History Review, 55: 35–51.CrossRef Google Scholar

,New York Federal Reserve Bank. “William J. Mcdonough, President Federal Reserve Bank of New York Before the Committee on Banking and Financial Services,” US House of Representatives, October 1, 1998.

,New York Law Journal. “International Banking,” September 7, 2005.

,New York Times. “Fallen Star: the Regulators; Fed Chief Defends U.S. Role in Saving Giant Hedge Fund,” October 2, 1998.

,New York Times. “Shaky Markets Prompt Rumors of Who's in Trouble,” August 10, 2007.

,New York Times. “In Mortgage Plan, Lenders Set Terms,” December 7, 2007.

North, Douglass and Weingast, Barry R.. December 1989. “Constitutions and Commitment: the Evolution of Institutions Governing Public Choice in Seventeenth-Century,” Journal of Economic History, 49(4): 803–32.CrossRef Google Scholar

,Northern Rock. “Corporate Profile”: http://companyinfo.northernrock.co.uk/investorRelations/corporateProfile/.

,Northern Rock. “Highlights”: http://companyinfo.northernrock.co.uk/investorRelations/results/stockEx062607.asp.

,Northern Rock. “Stock Exchange Announcement Northern Rock PLC: Trading Statement for the 9 months to 30 September 2006,” issued October 2, 2006: http://companyinfo.northernrock.co.uk/investorRelations/results/stockEx061002.asp.

,Northern Rock Foundation. “History”: www.nr-foundation.org.uk/about_history.html.

Oberholtzer, Ellis P. 1907. Jay Cooke, Financier of the Civil War. Philadelphia: G.W. Jacobs & Co.

Obstfeld, Maurice, Shambaugh, J.C., and Taylor, A.M.. Special Issue 2004. “Monetary Sovereignty, Exchange Rates, and Capital Controls: The Trilemma in the Interwar Period,” IMF Staff Papers 51: 75–108.Google Scholar

,Office of Thrift Supervision. 2006 Fact Book, June 2007.

Patterson, R.H. 1870. “On our Home Monetary Drains, and the Crisis of 1866,” Journal of the Statistical Society of London, 33(2): 216–42.CrossRef Google Scholar

Pérez, Jr., Louis A. 1986. Cuba under the Platt Amendment, 1902–1934. Pittsburgh: University of Pittsburgh Press.Google Scholar

Pezzolo, Luciano. “Italian Monti: the Origins of Bonds and Government Debt,” Yale University Working Paper.

Poole, William. November 30, 2001. “How Transparent Should a Central Bank Be?” The Philadelphia Fed Policy Forum, Federal Reserve Bank of Philadelphia.

,Reuters, “Britain Passes Northern Rock Nationalization Law,” February 21, 2008: http://www.reuters.com/article/businessNews/idUSL2138183920080221?feedType=RSS&feedName=businessNews.

Robinson, Joan. 1952. “The Generalisation of the General Theory,” in Joan Robinson, The Rate of Interest and Other Essays. London: Macmillan.

Rockoff, Hugh. 1971. “Money, Prices and Banks in the Jacksonian Era,” in Fogel, Robert W. and Engerman, Stanley L. (eds.). The Reinterpretation of American Economic History. New York: Harper & Row: 448–58.Google Scholar

Rousseau, Peter and Sylla, Richard. 2003. “Financial Systems, Economic Growth and Globalization,” in Bordo, M., Taylor, A.M. and Williamson, J.G. (eds.). Globalization in Historical Perspective. Chicago: University of Chicago Press: 373–416.Google Scholar

Schloemer, Ellen, Wei Li, Keith Ernst and Keest, Kathleen. December 2006. “Losing Ground: Foreclosures in the Subprime Market and Their Cost to Homeowners,” Center for Responsible Lending.

Schubert, Eric Stephen. 1986. “The Ties that Bound: Market Behavior in Foreign Exchange in Western Europe during the Eighteenth Century,” unpublished Ph.D. thesis, University of Illinois at Urbana-Champaign.

Soboul, Albert. 1966. La France à la veille de la Révolution. Paris: Société d'Édition d'enseignement Supérieur.Google Scholar

,Spiegel On-line International. “Bail-Out for Subprime Casualty: Baden-Württemberg Bank to Buy SachsenLB,” August 27, 2007: www.spiegel.de/international/business/0,1518,502203,00.html.

Stewart, James B. 1991. Den of Thieves, New York: Simon & Schuster.Google Scholar

Stone, Dan G. 1990. April Fools: an Insider's Account of the Rise and Collapse of Drexel Burnham. New York: D.I. Fine.Google Scholar

Sylla, Richard. December 1969. “Federal Policy, Banking Market Structure, and Capital Mobilization in the United States, 1863–1913,” Journal of Economic History, 29(4): 657–86.CrossRef Google Scholar

Temin, Peter. 1969. The Jacksonian Economy, New York: W. W. Norton.Google Scholar

Tracy, James D. 1985. A Financial Revolution in the Habsburg Netherlands: Renten and Renteniers in the County of Holland, 1515–1565. Berkeley: University of California Press.Google Scholar

,Wall Street Journal. “Citigroup Swings to a Loss, Plans to Raise More Capital,” January 16, 2008.

,Washington Post. “Banks Drop Plan Aimed at Easing Credit Crunch,” December 22, 2007.

Weber, Warren E. June 2006. “Early State Banks in the United States: How Many Were There and When Did They Exist?” Journal of Economic History, 66(2): 433–55.CrossRef Google Scholar