11 years on from the run on the Rock
Images of anxious customers queueing-up to take their money out of Northern Rock, for many marked the start of the financial crisis in the UK.
It was, after all, the first run on a bank since 18661 and began after it was revealed that Northern Rock was being bailed out by the Bank of England.
The bank’s woes started after it borrowed funds on the international money market to lend to homebuyers. When these credit markets seized up in August 2007, Northern Rock began to run out of money. As the run on Northern Rock escalated, the government was forced to intervene, with the Chancellor at the time, Alistair Darling, promising on 17 September 2007 to guarantee all the bank’s deposits.
Following two unsuccessful takeover attempts, Northern Rock was eventually nationalised on 22 February 2008 to avoid insolvency. At the time, Darling pledged that the government would only hold onto the bank for “a temporary period”2 and that long-term ownership must lie in the private sector. This eventually happened four years later, when the government sold Northern Rock to Virgin Money.
Northern Rock was, of course, not the only casualty. Just a few months after it was nationalised, US bank Lehman Brothers filed for bankruptcy. In October 2008, the UK government was forced to inject £37bn3 into RBS, HBOS and Lloyds TSB to prevent the collapse of the British banking sector.
The UK market, took a major hit in the wake of the uncertainty, with the FTSE 100 suffering a steep fall.
What’s happened since
In the 11 years since the run on Northern Rock, much has happened. The UK market, despite recent volatility, is still some way off the lows it hit during the crisis. In addition, a whole raft of new regulations were introduced in a bid to prevent another financial crisis occurring.
These include a requirement for banks to have significantly stronger balance sheets so that they are much more resilient to shocks. In the Bank of England’s latest (2018) stress testing of the UK banking system, the Prudential Regulation Committee (PRC) judged that all Britain’s major banks now have sufficient capital to ensure they are resilient to large falls in asset prices and recessions worse than the financial crisis.5 Banks have had to establish a total buffer of £11.4bn to protect themselves against the potential risks posed by Brexit.6
In addition, banks are no longer so reliant on short-term finance from wholesale markets to fund mortgages, depending much more heavily on retail deposits. Additionally, to ensure that there’s no repeat of savers queuing to withdraw their cash, the government has increased the level of protection available from the Financial Services Compensation Scheme (FSCS) to £85,0004 per person per authorised bank or building society, up from £31,700 in 2007.
With Brexit scheduled to happen next month, and ongoing uncertainty about Britain’s future outside the European Union, these safeguards should provide valuable peace of mind that the banking sector is better prepared to withstand whatever lies ahead.
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