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INTRODUCTION
In the autumn of 2007, Britain experienced its first bank run of any significance since the reign of Queen Victoria.1 The run was on a bank called Northern Rock. This was an extraordinary event, and the lapse of time since its immediate predecessor is the least extraordinary aspect of it, for Britain had been free of such episodes not by accident, but because by early in the third quarter of the nineteenth century the Bank of England had developed techniques to prevent them. These techniques had been used, in Britain and elsewhere, had worked, and appeared to be trusted. A second extraordinary aspect of the affair was that it was the decision to provide support for the troubled institution that triggered the run. That run was halted only when the Chancellor of the Exchequer (Alistair Darling 2 ) announced that he would commit taxpayers' funds to guarantee every deposit at Northern Rock. And third, unlike most runs in banking history, it was a run only on that institution; funds withdrawn from it went only to a trivial extent to cash, and were largely redeposited in other banks or in building societies.
The main aim of this paper is to address the basic question of why the traditional techniques for the maintenance of banking stability failed - if they did fail - on this occasion. We then consider how these techniques may need to be changed or supplemented to prevent such problems in the future.
The paper starts with a narrative of the events leading up to and immediately following the bank run. We then turn, insofar as these can be separated from that narrative, to banking policy before the event and to the policy responses after it.3 In the course of discussing these, we suggest both why the decision to provide support triggered the run, and, more tentatively, why the run was confined to one institution.
This prepares the way for our consideration of why the traditional response appeared to fail, and of what should be done to help prevent the recurrence of such episodes.
WHAT HAPPENED? DESCRIPTION AND CHRONOLOGY
Background
Northern Rock was founded as a 'building society'. These societies were mutuals, owned by their depositors and their borrowers. Their...