Shattered on the Rock? British financial stability from 1866 to 2007

Abstract

This paper provides an answer to the basic question of why in the United Kingdom the traditional techniques for the maintenance of banking stability appeared to fail in the Northern Rock episode. It also considers how the techniques may need to be changed or supplemented to prevent such problems in the future. We propose the following actions to make the banking system robust. First, there should be 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. Second, there should be reform of deposit insurance, such that whatever sum is guaranteed is completely guaranteed, and can be accessed without any significant delay. Third, arrangements need to be made such that 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. © 2009 Palgrave Macmillan.