We Are Seeing (October 2019) the Ghosts of Past Bank Failures, Most Recently in the UK (2007) with Northern Rock

I have a strong suspicion we are seeing the ghosts of past bank failures, most recently in the UK, the sorry tale of Northern Rock which I closely observed. For non-British readers, a short reminder: as a licensed bank, Northern Rock was a mortgage lender which got into difficulties in September 2007, before being nationalized the following February. An old-fashioned run with customers queuing outside its branches seeking to withdraw their deposits had alerted the general public to Northern Rock’s problems. It was unable to tap wholesale money markets, because other banks were unwilling to lend to it on an uncollateralized basis.

The establishment missed the point. As Gillian Tett wrote in the Financial Times at the time, there were increasing concerns over how Libor [London Interbank Offered Rate] was operating. There was a growing divergence in the rates that different banks were quoting in the various currencies priced in Libor, discriminating against the smaller borrowers (actually, an indication of growing counterparty risk, not a supposed failure of Libor). Furthermore, larger banks were reducing their exposure to Libor by sourcing funds from the treasury operations of large companies and using the developing repo market (which is collateralized, unlike Libor — a further indication of increasing systemic concerns) to maintain their overnight balances instead.

—Alasdair Macleod, “The Ghosts of Failed Banks Have Returned,” in Anatomy of the Crash: The Financial Crisis of 2020, ed. Tho Bishop (Auburn, AL: Mises Institute, 2020), 55.