Northern Rock: Keeping its failure hushed up wouldn't have helped anyone

The events of the financial crisis will be much discussed over the coming weeks, with a string of decidedly unhappy 10 year anniversaries due.

Even with the country in the middle of another profound crisis, that’s no bad thing. The maelstrom of 2007 and 2008 plunged a dagger into the heart of the British economy, and the unfinished business from it surely played a role in stoking the feelings that led to the unfolding disaster of Brexit.

That being the case, what to make of the latest statements made by Mervyn, now Lord, King who played a pivotal role during those events as Governor of the Bank of England?

Lord King, who has been busily putting himself about a bit, has told the BBC that he advised that the emergency support handed to the Rock by the Bank could, and should, have been kept secret, as had been the way of the things during previous banking crises.

There's still a lot of nostalgia for the time when the Governor would make a few calls and wrap up the rescue of a troubled institution before anyone was aware it was troubled.

But like most of the nostalgia for past ages, the rosy view of the way things were handled rarely stands up to scrutiny.

And let's imagine the Rock's difficulties had been kept hushed up. For how long would it have been possible to keep its crisis quiet? Secrets have a habit of leaking out, as they did then. Northern Rock's problems were announced not by the bank, nor by the its regulators, but by the journalist Robert Peston.

The fact is, it had failed. To keep that quiet, Lord King would have needed to find a saviour, and quickly. Who would have done that?

Several institutions were successfully rescued during the crisis, notably HBOS, by Lloyds, but also a number of smaller fry. That doesn't mean that there would have been a knight in shining armour out there for the Rock, if Lord King had got his way.

Ultimately the publicity surrounding Northern Rock’s difficulties, and the run on the bank that followed, might have been a very good thing, even if the sight of people lining up for their cash outside its branches gives people like Lord King sleepless nights (as it should).

That publicity exposed deep flaws in the procedures for dealing with broken banks. While America’s Federal Depository Insurance Corporation guaranteed deposits of up to $100,000, raised to $250,000 during the crisis, and acted a receiver, sorting out the transfer of deposits to new institutions, British depositors would only get 90 per cent under the system in place at the time.

Lord King talked of the “moral hazard” of offering a full guarantee, the risk that people would fail to take due care with their money if it was that easy.

The trouble is, when people knew that the Rock was in trouble, pulling out became the sensible and logical thing to do. Why risk losing 10 per cent of your money?

Those queues led to a much improved system of depositer protection in the UK. That has to be a good thing.

Now is a very good time to revisit some of the issues thrown up by the crisis. This is one on which Lord King is wrong. There will be others.