A Study Of The Run On The Northern Rock

Bank runs is always one of the main problems in the development of banking, this is because the banks’ business pattern of borrowing in short time but loaning in long time, which leads to the mismatch of its assets and liabilities. Mismanagement or temporary liquidity crisis, even rumors about some bank problems are likely to trigger a bank run. Considering the Sequential Service Constraint, when bank runs happen, depositors rush to withdraw their money, which can cause bank’s liquidity shortage, or lead to bankruptcy due to insufficient solvency, make losses to depositors, and even may trigger runs on other normal banks, cause the infection and spread of bank runs, and cause systemic financial crisis, which is harmful to the stability of the financial system.Many scholars both at home and abroad, with Diamond&Dybvig (1983) as a representative, research on bank runs in detail, they explain the cause of a bank run from two aspects: Spontaneous runs and Information runs. Correspondingly they also put forward precautionary and disposal measures, including mechanism of early warning and error correction on the banking crisis, liquidity support from the central bank, deposit insurance and full disclosures of information. But throughout the whole evolution process of bank runs, we can find that Deposit Insurance System has a prominent role in the prevention and treatment of a bank run, it can effectively protect the safety of depositors’ deposit, preventing depositors from suffering serious damage to their property in times of crisis, thereby enhancing depositors confidence in the banking industry, maintaining the long-term stability of the financial system. Therefore, Deposit Insurance System is regarded as the last line of defense in a nation’s financial safety net.The occurrence of bank runs may caused by bank’s own internal reasons, also could be the result of external factors’ impact. On September14,2007, a run happens on the Northern Rock in Britain, caused a large number of depositors lined up to withdraw, then the share price of Northern Rock goes down again and again, finally through the nationalization of Northern Rock, the run disappears. The run on the Northern Rock is the ironic event after Europe’s financial system is affected by the financial crisis. From the characteristics of the run on Northern Rock and the practice of Britain’s financial regulatory system before and after the run, we can get a unique experience and lesson for our country in crisis prevention and disposal, especially from the importance of the British deposit insurance institutions in the disposal of the run on Northern Rock, we can get an important enlightenment to set up deposit insurance system. This paper introduces the classical model of bank runs, and through the game analysis to explain the mechanism of bank runs, then combined with the event of Northern Rock, explains the causes and treatments of bank runs in detail. Finally, combined with the situation of our country, we get reference and enlightenment from the run on the Northern Rock, and pointed out that China should establish explicit deposit insurance system as soon as possible, to protect the interests of the depositors and the safety of banking system and to make our country’s financial safety net be more perfect.