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De Cecco, Francesco --- "State Aid Law Meets Financial Regulation" [2011] ELECD 613; in Gray, Joanna; Akseli, Orkun (eds), "Financial Regulation in Crisis?" (Edward Elgar Publishing, 2011)

Book Title: Financial Regulation in Crisis?

Editor(s): Gray, Joanna; Akseli, Orkun

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781848445543

Section: Chapter 4

Section Title: State Aid Law Meets Financial Regulation

Author(s): De Cecco, Francesco

Number of pages: 16

Extract:

4. State aid law meets financial
regulation
Francesco De Cecco

INTRODUCTION

The origins of Northern Rock's troubles and the events that fol-
lowed are well documented. The bank financed its loans through
asset securitization and through wholesale funding: if the securiti-
zation channel was to dry up, the wholesale money markets would
compensate. It did not account for the possibility that both channels
would become suddenly and simultaneously unviable, a risk which,
in the words of the Bank of England's Financial Stability Report,1
`crystallized, with unexpected ferocity' in the summer of 2007. When
the US sub-prime mortgage crisis brought the mortgage securiti-
zation markets to a stand-still, and the wholesale money markets
seized up, Northern Rock found itself unable to raise sufficient funds
in order to carry out its day-to-day operations. After unsuccessfully
exploring a private market solution, the bank eventually sought, and
obtained, liquidity support from the Bank of England as lender of
last resort. When the news was made public, a bank run followed,
which gradually came to an end after the Treasury announced
guarantee arrangements for all existing accounts in Northern Rock,
and, subsequently, agreed to cover all new retail deposits as well.
In the months that followed, the government and the ailing bank
attempted in vain to find a private sector solution (a merger or a
takeover). After it had become abundantly clear that no market
player would step in without a substantial contribution from the
public purse, in ...