Liquidity, Bank Runs, and Bailouts: Spillover Effects During the Northern Rock Episode

Article

Abstract

In September 2007, Northern Rock—the fifth largest mortgage lender in the United Kingdom—experienced an old-fashioned bank run, the first bank run in the U.K. since the collapse of City of Glasgow Bank in 1878. The run had been contained by the government’s announcement that it would guarantee all deposits in Northern Rock. This paper analyzes spillover effects during the Northern Rock episode and shows that both the bank run and the subsequent bailout announcement had significant effects on the rest of the U.K. banking system, as measured by abnormal returns on the stock prices of banks. The paper also shows that the effects were a rational response by investors to market news about the liability side of banks’ balance sheets. In particular, banks that rely on funding from wholesale markets were significantly affected, a result consistent with the drying up of liquidity in wholesale markets and the record-high levels of the London Interbank Offered Rate (LIBOR) during the crisis.

Keywords

Contagion Banking crisis Bank run Liquidity Event study Systemic risk Bailout 

JEL Classification

G21 G14 G28 E58 D62 

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Copyright information

© Springer Science+Business Media, LLC 2009

Authors and Affiliations

  1. 1.Office of the Doctoral ProgramHarvard Business SchoolBostonUSA
  2. 2.Federal Reserve Bank of New YorkNew YorkUSA

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