Bank Run Case Study

Bank Run: A situation that occurs when a large number of bank or other financial institution's customers withdraw their deposits simultaneously due to concerns about the bank's solvency. As more people withdraw their funds, the probability of default increases, thereby prompting more people to withdraw their deposits. In extreme cases, the bank's reserves may not be sufficient to cover the withdrawals. A bank run is typically the result of panic, rather than a true insolvency on the part of the bank; however, the bank does risk default as more and more individuals withdraw funds - what began as panic can turn into a true default situation.

In the space of nine years, beginning from June 1998 to June 2007 Northern Rocks total assets grew

Gordon Browns new system of splitting the responsibility up has failed its first big regulatory test.

Another lesson to be learnt is that from this is that by not regulating the bank with enough stringent measures it forced the government’s hand which in turn set a very dangerous precedent. This is as it encouraged savers and investors to put their money in high rate accounts in unsound banks and shareholders to invest in such banks, safe in their knowledge that the government is there to save them should all go wrong as in the case of Northern Rock.

The blame on what also could be learnt from is the lack of real alertness by the Financial Services Authority. Central bankers had for months had warning about the likelihood of credit tightening. The Financial Services Authority should have been paying attention and warning Northern Rock against engaging in such a risky strategy.

The Financial Services Authority vigilance is vital as it is the guardian of the public scheme of deposit insurance. Last year, it said the scheme was working just fine but when tested the scheme failed, depositors neither understood nor trusted

It has exasperated the systems flaws; nobody was in charge of the operation. The question that arose from all of this was why are charges not made? To answer this, the people running the system are to blame, not the system itself. It was said that nobody trust politician. Regulators are always disliked. But central bankers are held to a higher standard, which is why Mervyn King is the victim, he lost his credibility and a central banker without credibility is not any use.

Another lesson learnt is the use of short term debt to finance long term assets. There are arguments for the desirability of short term debt in disciplining managers. Calomiris and Kahn (1991) have argued that the demand deposits for banking arose naturally as a response by the banks owners and managers neither to commit nor to engage in actions that dissipate the value of the assets under pain of triggering a depositor