News

Expert comment: Northern Rock crisis first anniversary – September 13

(11 September 2008)

Public’s confidence in banks will take decades to re-build, says expert one year on from Northern Rock crisis

Britain’s reputation for financial stability has been seriously undermined and trust in the financial system will take decades to regain, says a leading financial history expert one year on from the Northern Rock crisis. Professor Ranald Michie from Durham University, who himself lost a significant amount of money as a shareholder, says all previous crises since the First World War were defused by the Bank of England up until last year. Saturday 13 September marks the first anniversary of the BBC revealing that Northern Rock had asked the Bank of England for emergency financial support. Professor Michie, who is a leading expert on the history of securities markets and stock exchanges, suggests that Britain’s financial bodies need to review their monitoring systems and build up the public’s confidence in banking which, one year on, is still at an all-time low. Professor Michie says: “There were no bank collapses in Britain in the 1930s despite the worldwide financial turmoil that took place in that decade. There was a secondary bank crisis of 1974 but none resulted in bank runs in Britain. “During these previous crises, action by the Bank of England managed to defuse these situations and avoided a panic leading to a bank run. The Bank of England at the time was headed up by a banker aware of the risks that banks always run in balancing borrowing and lending. Up until last year, the Bank of England had learnt from its previous mistakes and avoided making them again. “The oversight over the financial system by the Treasury, Bank of England and the Financial Services Authority and their large staff should have made it impossible for a crisis to get out of control the way it did”. Professor Michie comments further on the impact of the bank run on the public’s confidence. He says: “A run on a bank is dramatic with crowds of worried people desperately trying to withdraw their savings in hard cash before the bank runs out of money and closes its door for ever. Scenes of this kind were beloved of Victorian novelists and even feature in that classic American movie, “It’s a Wonderful Life”. Until a year ago, the possibility of a bank run in Britain seemed as out of date as steam trains and the Empire. “It is for those reasons that what happened to Northern Rock dealt such a shattering blow to the public’s confidence in Britain’s financial system and pricked the bubble on Brown’s image as the iron chancellor. How could a dour Scot, coming from the home of prudent finance, have presided over the first major bank run in Britain since before the First World War?”