Would a bank collapsing in the Northern Rock vein receive a bailout today?

Would a bank collapsing in the Northern Rock vein receive a government bailout today?

YES – Vicky Pryce, board of CEBR and former joint head of the Government Economic Service.

The 2007/8 financial crisis demonstrated the importance of the financial sector for the proper functioning of the economy. Of course, banks are now better capitalised and undergo strict stress tests, the supposedly more risky investment banking divisions are being “ring-fenced”, and the Bank of England now has the power to make investors rather than taxpayers shoulder the pain.

But Northern Rock was a box standard retail bank that got into trouble.

In the current tighter environment, potential external risks include Brexit uncertainty, a sudden world growth downturn, a war, an asset bubble bursting, cyber attacks, an abrupt reversal of unconventional monetary policy, or a massive fine or tax liability imposed on one bank that could be applied to others too. All these can create a crisis of confidence and threaten financial stability.

The state intervened recently in Italy with the public rescue of the Veneto banks. It could easily happen here too.

NO – Jeremy Jennings-Mares, partner at law firm Morrison & Foerster.

The post Northern Rock and financial crisis regulatory framework, including the Bank Recovery and Resolution Directive and EU state aid rules, means that EU countries today have much less scope to rescue a bank via a public-sector bailout.

If today’s regulation had been in place, it is highly unlikely that Northern Rock would have received a government bailout. In particular, the designation of banks as “systemically important”, which has come in since the financial crisis, would have excluded Northern Rock, unlike its peers RBS and Lloyds.

The current regime also imposes tougher rules to ensure more stable banks and resolution mechanisms that should prevent the need for public-sector bailouts. As the Banco Popular example showed, while the execution was far from perfect, the mechanisms in place ensured a resolution that did not involve government funds.

While the system has yet to be tested on a larger scale, we as taxpayers should take some comfort from the significantly sturdier regulatory landscape.

Let's block ads! (Why?)