Liquidity,Bank Runs and Bailouts:Spillover E¤ects During the Northern Rock Episode1
Tanju Yorulmazer2
Federal Rerve Bank of New York
J.E.L.Classi…cation:G21,G14,G28,E58,D62
Keywords:banking crisis,contagion,event study,systemic risk
This Draft:15February2009
1I am grateful to Viral Acharya,Robert DeYoung,Douglas Gale,Beverly Hirtle,Donald Morgan, David Skeie,Til Schuermann,and Hyun Shin for helpful suggestions.I would like to thank Paul Goldsmith-Pinkham for excellent rearch assistantship.The views expresd in this paper are tho of the author and do not necessarily re‡ect the views of the Federal Rerve Bank of New York or the Federal Rerve System.
2Contact:Federal Rerve Bank of New York,33Liberty Street,New York,NY10045.Tel:212 7206887Fax:2127208363,E–mail:Tanju.Yorulmazer@ny.frb.
Liquidity,Bank Runs and Bailouts:Spillover E¤ects During the Northern Rock
Episode
Abstract
In September2007,Northern Rock-the…fth largest mortgage lender in the UK-expe-rienced an old-fashioned bank run,the…rst bank run in the UK since the collap of City of Glasgow Bank in1878.The run had been contained by the bailout announcement of the government that guaranteed all deposits in Northern Rock.This paper analyzes spillover ef-fects during the Northern Rock episode and shows that both the bank run and the subquent bailout announcement had signi…cant e¤ects on the rest of the UK banking system,measured by abnormal returns on the stock price of banks.The paper also shows that the e¤ects were a rational respon of investors to market news about the liability side of bank balance sheets. In particular,banks that rely on funding from wholesale markets were signi…cantly a¤ected, which is consistent with the drying up of liquidity in wholesale markets and the record high levels of the London Interbank O¤ered Rate(LIBOR)during the crisis.傻瓜英文
J.E.L.Classi…cation:G21,G14,G28,E58,D62
幼师证Keywords:contagion,bank run,liquidity,event study,systemic risk,bailout.
1Introduction
The recent…nancial turmoil that started in the summer of2007once again showed that cris and bank runs are an important feature of our…nancial landscape.1In mid-September2007, Northern Rock experienced an old-fashioned bank run,where depositors formed long queues in front of its branches to withdraw their money.This marks the…rst bank run in the UK since the collap of City of Glasgow Bank in1878.Eventually,the run had been contained by the bailout announcement of the government that guaranteed all deposits in Northern Rock.
dinnerSpillover of di¢culties from one bank to the rest of the system is of prime concern for authorities and is the main rationale for the regulation of the…nancial system.Loss and 1Lindgren,Garcia and Saal(1996)show that during the period1980-96,of the181IMF member coun-tries,133have experienced signi…cant banking problems.Such problems have a¤ected developed,as well as developing and transitional countries.Also,e Dell’Ariccia,Detragiache and Rajan(2007)for an analysis of real e¤ects of banking cris.
1
di¢culties of banks can spillover to the rest of the system through various channels such as direct exposures via interbank linkages(Allen and Gale,2000),information spillover where di¢culties of one bank can be interpreted as a bad a signal for the soundness of other banks (Chen,1999),and illiquidity and ast prices(Diamond and Rajan,2001,Gorton and Huang, 2004,and Cifuentes,Ferucci and Shin,2005).
This paper us an event study methodology to analyze the Northern Rock episode to detect spillover e¤ects to the rest of the UK banking system.2The paper us stock price reactions to investigate the prence of spillover.In the event studies in the literature,spillover is usually tested by comparing the“normal”return of a stock,as predicted by a standard market equilibrium model,such as the CAPM,estimated using historical data,with the actual returns at the day of the event or during a window around the event date.Signi…cant abnormal returns for other banks are regarded as evidence for spillover e¤ects.
高考落榜的出路This paper analyzes the spillover e¤ects to the rest of the banking system resulting from the bank run on Northern Rock and the subquent government bailout,and shows that both the bank run and the bailout announcement had spillover e¤ects to the rest of the banking system,measured by signi…cant abnormal returns on stock price of banks.The paper also shows that the spillover e¤ects
were a rational respon of investors to market news and can be explained by the characteristics of a¤ected banks.In particular,the spillover e¤ects can be explained by the funding characteristics of banks where banks that rely on wholesale markets were a¤ected verely.This…nding is consistent with the developments in…nancial markets prior to the run on Northern Rock,where liquidity dried up in debt and interbank markets, leading to record high levels of LIBOR(e Figure1).Hence,the spillover is associated with the liability side of bank balance sheets,rather than the ast side.
Figure1here
This paper is related to the literature on bank runs(Bryant,1980,Diamond and Dybvig, 1983,Allen and Gale,1998,Calomiris and Kahn,1991,and Chari and Jagannathan,1998 and others),and their origins(Gorton,1988,and Gorton and Calomiris,1991),and runs in wholesale funding markets(Huang and Ratnovski,2008).The paper is also related to the event studies in the empirical banking literature that analyze spillover by testing whether bad news,such as a bank failure,the announcement of an unexpected increa in loan-loss rerves,bank asoned stock issue announcements,etc.,adverly a¤ect other banks.3The 2See MacKinlay(1997)and Chapter4in Campbell,Lo and MacKinlay(1997)for a detailed discussion of event studies in Economics and Finance.
3See De Bandt and Hartmann(2002)for an excellent survey of theoretical and empirical models of systemic risk and the references therein for further discussion.
studies u a variety of indicators such as:intertemporal correlation of bank failures(Hasan and Dwyer1994,Schoenmaker1996),bank debt risk premiums(Carron,1982,Saunders, 1987,Cooperman,Lee and Wolfe,1992,Jayanti and Whyte,1996,Morgan and Stiroh,2001), deposit‡ows(Saunders,1987,Saunders and Wilson,1996,Schumacher,2000),survival times (Calomiris and Mason,1997,2003),and stock price reactions(Aharony and Swary,1983, Swary,1986,Slovin,Sushka,and Polonchek,1992,and1999,and Lang and Stulz(1992),to cite a few).
announce
Section2provides a discussion of the Northern Rock episode.Section3discuss the two events that have been analyzed and the event study methodology that has been employed,and analyzes the abnormal returns and their relation to bank characteristics.Section4concludes. 2A summary of the Northern Rock crisis
Box1prents a timeline of the events during the Northern Rock episode.4
Box1here
aivSince its conversion from a building society-a residential mortgage lender owned by its savers and borrowers-to a stock-form UK bank in1997,Northern Rock grew remarkably to become Britain’s…fth-biggest mortgage provider.Northern Rock’s success crucially depended on a particular business model that relied heavily on curitization and funding from wholesale markets,rather than the“traditional”model of banking of funding from retail deposits and holding the loans on the balance sheet until maturity.5Even though retail deposits can be more costly,many banks still prefer them since they are a more resolute source of funding, compared to wholesale funding.6
杰森英语>cymo4The timeline and the discussion here relies on the description of the Northern Rock episode in the October 2007Financial Stability Report of the Bank of England,the articles entitled“Down the Drain”and“Lessons of the Fall”in the September6,2007and October18,2007issues of The Economist,respectively,and the BBC website:uk/2/hi/business/7007076.stm.
5Northern Rock had only76branches in2007and retail deposits accounted for only27%of its liabilities, whereas wholesale funding accounted for68%of its liabilities,according to its interim results in June2007. In January and May2007,Northern Rock raid10.7billion pounds through curitization,which made it the top curitizer among British banks.
邯郸市第三中学
6This can ari due to the costs associated with changing banks that unsophisticated depositors incur, such as switching and arching costs.For example,data collected on current account switching behavior from the Financial Rearch Survey of the National Opinion Poll for the UK imply that a reprentative current account holder would only change banks every91years(Gondat-Larralde and Nier,2006).
The business model of Northern Rock made it vulnerable to adver developments in wholesale markets.In the summer of2007,the ongoing increa in arrears on US sub-prime mortgages led to a sharp increa in credit spreads on US sub-prime curities.Information problems associated with complex…nancial structures led to uncertainty about the nature and the source of loss and from July on spreads on ast-backed curities ro in world markets. This led to a drying up of liquidity in short-term debt markets such as the ast-backed commercial paper(ABCP)market where conduits and structured investment vehicles(SIV) rely on.Conduits and SIVs were mainly t up by banks as o¤-balance sheet entities to allow banks to extend their lending without the pressure of regulatory capital requirements,and most conduits and SIVs had back-up liquidity facilities with banks.When the ABCP market ized to provide the needed liquidity,conduits had no choice but to tap their bank lines of credit.This resulted in many of the risks that were thought to be o¤-balance sh
eet rushing back to bank balance sheets and created an enormous strain on bank liquidity.Uncertainty about liquidity needs led banks hoard liquidity rather than lend it in markets,which resulted in drying up of liquidity in wholesale markets and the LIBOR reaching record high levels(e Figure1).
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The developments in…nancial markets adverly a¤ected Northern Rock that relied on -curitization and wholesale markets for funding.On August13th,Northern Rock approached authorities and told the FSA about its di¢culties.This information had been shared with the Bank of England and the Treasury.7By mid-September the longer-term funding markets were clod for Northern Rock.While the possibility of Bank of England acting as a lender of last resort had been discusd among the authorities,the option of lling Northern Rock to another bank had been tried…rst.While Lloyds TSB emerged as a rious contender, the deal did not go through since Lloyds’demand for a loan from the Bank of England had been rejected by the tripartite authorities on the grounds that it would not be appropriate to help…nance a bid by one bank for another.8On September13th authorities agreed that the Bank of England should provide emergency assistance to Northern Rock.On the same day,in the evening news,the BBC revealed that Northern Rock has asked for and been granted emergency support from the Bank of England.The government put out a public statem
ent on September14th(Friday)con…rming that the Bank of England would be ready to act as a lender of last resort.The developments con…rmed the extent of di¢culties and resulted in a depositor run on Northern Rock.On the evening of17September(Monday), 7According to the tripartite structure,the Bank of England,the FSA and the Treasury are mandated to deal with cris and the respective roles of the three institutions are t out under a“Memorandum of Understanding.”
8Acharya and Yorulmazer(2008)analyze various policy options to resolve bank failures such as liquidation, bailouts,sale of a failed bank to a healthy bank,with and without government assistance.They show that the sale of a failed bank to a healthy bank with government assistance can be preferable to bailing out the failed bank from a social welfare point of view.
