2009/01/01 by Hyun Song Shin · 1 citation
Economics, Econometrics and Finance · #Banking stability, regulation, efficiency #Global Financial Crisis and Policies #Credit Risk and Financial Regulations #Securitization #Balance sheet #Leverage (statistics) #Financial crisis #Bank run #Debt #Financial system #Business #Resizing #Finance #Economics #Market liquidity #Economic policy #Macroeconomics #European union
paper · pdf · doi:10.1257/jep.23.1.101
openalex publication_date 2009/01/01 · openalex created_date 2025/10/10 · openalex updated_date 2026/08/04
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.