Correspondence: Alistair Milne, 106 Bunhill Row, London EC1Y 2TZ, UK

¹is Reader in Banking and Finance at the Cass Business School, City University London (UK) and holds a PhD in Economics from London School of Economics (UK). His previous posts include Economic Adviser to the Bank of England, a lecturer in the Department of Economics at University of Surrey, Research Fellow at London Business School, Senior Economist at HM Treasury and a statistical adviser to the government of Malawi.

²is a Professor in Banking at the Cass Business School, City University London (UK) and a visiting Professorial Fellow in the Centre for Commercial Law Studies at Queen Mary and Westfield College, University of London, and has been a visiting professor at the University of Athens. In the academic year 2004–2005, he was Visiting Professor at the University of Oxford. He was a lecturer at the University of Warwick and then Visiting Scholar at the Bank of England, the Federal Reserve Bank of St Louis from 1977 to 1978, the New Zealand Treasury and the Federal Reserve Bank of New York, and served as Research Adviser at the Bank of Finland. He is on the editorial boards of the Greek Economic Review, The Journal of Financial Education and the European Journal of Political Economy, and is a general editor of the Journal of Financial Regulation.

Received 24 November 2008; Revised 24 November 2008.

Abstract

This paper provides an answer to the basic question of why in the United Kingdom the traditional techniques for the maintenance of banking stability appeared to fail in the Northern Rock episode. It also considers how the techniques may need to be changed or supplemented to prevent such problems in the future. We propose the following actions to make the banking system robust. First, there should be arrangements for prompt and orderly closure of a bank as it approaches problems, before it would otherwise be forced to close by either insolvency or illiquidity. Second, there should be reform of deposit insurance, such that whatever sum is guaranteed is completely guaranteed, and can be accessed without any significant delay. Third, arrangements need to be made such that customers retain access to all core banking services either through speedy transfer of all accounts or the continued operation in some guise of the troubled bank.