Between a Rock and a Hard Place - A Post-Northern Rock Regime for the Rescue of Failing Banks

Abstract

Following the passage of the Banking (Special Provisions) Act 2008, the UK government began a process of consultation to review existing legal powers for the handling of banks and financial institutions that had encountered financial difficulties or were facing insolvency as a result of the financial crisis. Fashioning a rescue regime that also maintained confidence in the banking system was the principal priority of the so-called Tripartite Authorities, the UK Treasury, the Bank of England and the Financial Services Authority. A series of consultation papers were issued seeking to develop a special resolution regime and other tools for the rescue of failing banks. These consultation papers did not propose more than a 'tweaking' of the existing system of bank rescue. The changes focussed on depositor protection and the speed at which depositors could receive their funds from failing banks; however, other stakeholder concerns, such as those of shareholders and creditors, were not given the same priority. To a large degree, this approach was a legacy of the bank run on Northern Rock plc in 2007 with a government now faced by a political concern to avoid any new damage to bank depositors. A much wider degree of consultation might have been undertaken given the range of interests involved so as to facilitate the development of a more comprehensive new banking rescue law. This process is another example of law making on the run in the midst of a majofinancial and economic crisis. Inevitably, laws produced in this way are limited in some way, but are hard to reform later. But, there is probably little other alternative in the circumstances.

Keywords: financial crisis, corporate rescue, banks, insolvency, law making

JEL Classification: K2, N4, K22, P41