The Role of Law and the Failure of Northern Rock
Elgar Financial Law series
Edited by Joanna Gray and Orkun Akseli
Chapter 2: Depositor Protection and Co-insurance after Northern Rock: Less a Case of Moral Hazard and More a Case of Consumer Responsibility?
2. Depositor protection and co-insurance after Northern Rock: less a case of moral hazard and more a case of consumer responsibility? Jenny Hamilton Northern Rock saw the first bank run in the UK since Victorian times. Shocking though it was at the time, the British public has since become rather more inured to bank failures, although none have resulted in the long queues of depositors seeking to withdraw their money as was witnessed at Northern Rock branches in September 2007. As a result of the Northern Rock failure a number of changes have been made to the UK depositor protection scheme (the Financial Services Compensation Scheme1) including raising, but not removing, the upper limit on the amount insured by the scheme.2 Inevitably perhaps, these reforms have led to renewed debates around the role of depositors in the banking system and in particular the potential for depositor protection insurance (‘Dpi’) schemes to promote ‘depositor moral hazard’. This is essentially an argument that states that unless depositors risk losing some or all of their deposits when banks fail they will have no incentive to monitor the safety and stability of banks. The depositor moral hazard argument is of course not new and has been well rehearsed in the voluminous literature on Dpi schemes both within the UK and elsewhere.3 What has received rather less attention in the literature is the more subtle, but related, issue of ‘consumer responsibility’ in the context of retail financial services generally. This is also not a particularly...
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