The Failure of Northern Rock: a Multi-Dimensional Case Study

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THE FAILURE OF NORTHERN ROCK: A MULTI-DIMENSIONAL CASE STUDY Edited By Franco Bruni and David T. Llewellyn

Chapters by: Tim Congdon Charles A.E. Goodhart Robert A. Eisenbeis and George G. Kaufman Paul Hamalainen Rosa M. Lastra David T. Llewellyn David G. Mayes and Geoffrey Wood Alistair Milne Marco Onado Michael Taylor

SUERF – The European Money and Finance Forum Vienna 2009

CIP
THE FAILURE OF NORTHERN ROCK: A MULTI-DIMENSIONAL CASE STUDY

Editors: Franco Bruni and David T. Llewellyn; Authors: Tim Congdon, Charles A. E. Goodhart, Robert A. Eisenbeis and George G. Kaufman, Paul Hamalainen, Rosa M. Lastra, David T. Llewellyn, David G. Mayes and Geoffrey Wood, Alistair Milne, Marco Onado, Michael Taylor Vienna: SUERF (SUERF Studies: 2009/1) ISBN-13: 978-3-902109-46-0 Keywords: Northern Rock, retail banking, mortgages, nationalisation, bank failure, United Kingdom, LPHI risk, lender of last resort, deposit insurance, market discipline, Countrywide, IndyMac, United States, deposit guarantees, supervisory failure, bank regulation, return on equity, business model, securitisation, financial regulation, financial stability, crisis management, banking law, insolvency, emergency liquidity assistance, cross-border bank insolvency, moral hazard, penalty rates, teaser rates, capital-asset ratios, Basel I, Basel II JEL Classification Numbers: D14, D18, D4, E21, E5, E51, E53, E58, G18, G2, G21, G28, G32, G33, G34, G38, K2, L1, L5, L51 © 2009 SUERF, Vienna Copyright reserved. Subject to the exception provided for by law, no part of this publication may be reproduced and/or published in print, by photocopying, on microfilm or in any other way without the written consent of the copyright holder(s); the same applies to whole or partial adaptations. The publisher retains the sole right to collect from third parties fees payable in respect of copying and/or take legal or other action for this purpose.

TABLE OF CONTENTS

Table of Contents Preface The Northern Rock Crisis: a multi-dimensional Problem (David T. Llewellyn) 1. Introduction 2. A multi-dimensional Case Study 3. The Context of Financial Market Turmoil 4. A multi-dimensional Problem 5. Institutional Structure of Supervision 6. The Resolution of the Crisis 7. Structural Flaws in the UK Regime 8. Assessment 9. References The Northern Rock Crisis in the UK (David G Mayes and Geoffrey Wood) 1. Introduction 2. The implications 3. Concluding remark 4. References Fallout from the credit squeeze and Northern Rock crises: Incentives, transparency and implications for the role of Market discipline (Paul Hamalainen) 1. Introduction 2. Tripartite Committee proposals and market discipline implications 3. The nature of risks in a changed financial landscape and implications for transparency 4. Conclusion 5. References Lessons from the Demise of the UK’s Northern Rock and the U.S.’s Countrywide and IndyMac (Robert A. Eisenbeis and George G. Kaufman) 1. Introduction 2. Background 3. Similarities and Differences Among the Three Cases 4. What the US and UK Should Have Learned from the US S & L Crisis and Subsequent Failures of Northern Rock, Countrywide and IndyMac

3 7 13 13 16 18 20 23 26 28 30 31 35 35 37 45 47

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5. Proposals to Remedy the Problems and Reform the Regulatory System 6. Summary and Conclusions 7. References Northern Rock: Just the tip of the Iceberg (Marco Onado) 1. Foreword 2. The rise and fall of Northern Rock 3. Northern Rock as a paradigm 4. Conclusions Blurring the Boundaries in Financial Stability (Michael W. Taylor) 1. Introduction 2. Justification for regulatory consolidation 3. The lender of last resort 4. Monetary policy and financial stability 5. Policy prescriptions 6. References Northern Rock and banking law reform in the UK (Rosa M Lastra) 1. Introduction 2. Northern Rock, an English ‘bank run’ in the twenty-first century 3. The regulatory and legislative responses to Northern Rock 4. The case for Lex Specialis...
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