A financial crisis does not have a clear beginning or end, but there are always a couple of moments that everyone remembers.
Northern Rock had grown from a modestly-sized building society into an aggressive bank, lending ever-more money at beguiling rates.
It was a model built for good times, for a confident economy, but it gummed up quickly when the global financial crisis started. Banks stopped lending to each other, and Northern Rock simply didn’t have the reserves to keep going.
In mid-August, it alerted the Financial Services Association that it didn’t have the money it needed. That message, in turn, went on to the Bank of England, which wondered what to do.
There hadn’t been a bank failure for a long time.
Barings had gone under in 1995, but that was really down to the actions of a trader.
It was over 140 years since customers had lost faith in their bank and caused a so-called run by whipping out their deposits.
But the Bank of England (BoE) was well aware that another run would happen if news leaked out of Northern Rock’s problems.
So nervous were they that the paperwork didn’t refer to the bank by name, but instead by a codeword – Elvis. Other banks and building societies were given other codewords – named after planets and animals.
“They immediately switched into codenames for the key banks we were talking about so if our papers got mislaid or something, they couldn’t just be photographed,” says Sir John Gieve, then the deputy governor of the Bank of England.
“But in truth I don’t think Mervyn (King, then the bank’s Governor) ever quite grasped which was which, so in the actual meetings, you talk about the actual institution.”
The BoE’s first idea was to find someone else to take over Northern Rock, but neither Lloyds nor RBS wanted to go through with a deal.
So the decision was taken to put emergency funding into the bank to keep it afloat – talks started with Northern Rock’s directors and lawyers about how to arrange the deal.
“We spent an inordinately large amount of time in the Bank of England,” remembers Andrew Bailey, the other deputy Governor at the time.
“When we were doing the big things we were there all night. We were regularly there up until midnight and into the early hours of the morning.
“On the night we put the loan in place…, Northern Rock’s lawyers turned up with a pro-forma set of documents and said here’s our standard terms.
“Juliet (the Bank of England’s lawyer) said ‘you do realise that you’re dealing with the Bank of England. We don’t take other people’s terms… this is not a haggle’.
“This must have been about two or three o’clock in the morning where they said ‘Well, we need to get the Northern Rock board to approve the loan…(but) our board’s all in their beds.
“I’m afraid I did lose it a bit at that point. I said ‘you’re going to get a director out of bed, we’re not hanging around waiting for your directors. You do realise your company’s standing on a cliff-edge’.”
The deal was agreed but, if anything, it made things worse.
News leaked out that Northern Rock was in trouble and emergency funding seemed to confirm that. Queues developed quickly, and appeared to symbolise a rapid loss of faith in British banking.
But Sir John Gieve thinks there was another reason for those queues: Northern Rock’s small branches.
“They’d deliberately economised on space in their branches so any queues in Northern Rock were on the pavement, and so they were easily visible.
“In the old banking halls, we’d have needed a couple of hundred before anyone else noticed but in Northern Rock, two was enough to fill the branch and you were straight out on the street.”
It was only when the Chancellor, Alistair Darling, guaranteed all the deposits in the bank that the run ended.
Northern Rock was fatally damaged, and would eventually be bought out by Virgin Money, but the British banking system was intact.
A much greater financial crisis was brewing, though, and the lessons of Northern Rock had to be learnt quickly.
“Had it not been for Northern Rock, and the queues and panic you could see, I often wonder if 12 months later Gordon Brown and I would have been so confident that we had to intervene and stop the rest of the banking system collapsing at all costs,” remembers Darling.
“If RBS had gone down, it would have brought down every other British bank, probably the American banking system and Europe as well.”
(c) Sky News 2017: Northern Rock – how the bank given the codename ‘Elvis’ changed the country