Journal of Economic Perspectives: Vol. 23 No. 1 (Winter 2009)


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Reflections on Northern Rock: The Bank Run That Heralded the Global Financial Crisis

Article Citation

Shin, Hyun Song. 2009. "Reflections on Northern Rock: The Bank Run That Heralded the Global Financial Crisis." Journal of Economic Perspectives, 23(1): 101-19.

DOI: 10.1257/jep.23.1.101


The U.K. bank Northern Rock became the first high-profile casualty of the global financial crisis of 2007-2008 when it suffered its depositor run in September 2007. In spite of the television images of long lines of depositors outside its branch offices, the run on Northern Rock was unlike the textbook retail depositor run caused by coordination failure. Also, contrary to received wisdom, its reliance on securitization was not an immediate factor in its failure. Rather, its problems stemmed from its high leverage coupled with reliance on institutional investors for short-term funding. When the de-leveraging in the credit markets began in August 2007, Northern Rock was uniquely vulnerable to the shrinking of lender balance sheets arising from the tick-up in measured risks. Financial regulation that relies on risk-weighted capital requirements is powerless against such runs. The Northern Rock case also offers lessons concerning the economics of short-term debt.

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Shin, Hyun Song (Princeton U)

JEL Classifications

G21: Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
G23: Pension Funds; Other Private Financial Institutions; Institutional Investors
G28: Financial Institutions and Services: Government Policy and Regulation


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