As a result, when Northern Rock got into trouble and a buyer could not be found, the Government had no alternative but to nationalise it – shareholders were wiped out and subsequently the Government was forced to inject £ billion of capital into the bank. A year later, when faced with the much bigger challenges of RBS and HBOS, the Government likewise had to step in.8 The situation was similar in other countries. While the US had a resolution regime, this only covered the insured deposit-taking entities within a banking group and proved unable to deal with the failure of large, interconnected groups. Similarly, SEC-regulated investment banks were outside of the scope of resolution regimes. While some European countries had bank-  8  4  Existing shareholders were not fully diluted in either RBS or HBOS. In the case of RBS, for example, they retained 16% of RBS’s total share capital (30% of voting shares). BIS central bankers’ speeches  specific insolvency regimes, they too did not have regimes that satisfy modern standards for bank resolution that would have guaranteed the continuity of critical economic functions. The shortcomings in terms of public institutions and powers have now been addressed in the key jurisdictions. We have, of course, yet to see how the new resolution powers operate in practice. But we now have a crucial, far reaching capability that we lacked entirely eight years ago. We need to be clear at this point what we mean by ‘resolution’ powers and authorities.
The impact has been identified and quantified; the bailout of Continental Illinois in 1984 artificially reduced the funding costs of all other banks that were considered ‘too big to fail’ by  4  2  The ‘Lifeboat’ was a Control Committee of the Bank of England and the English and Scottish clearing banks, consisting of senior representatives of each under the chairmanship of the Deputy Governor of the Bank, which first met on 28th December 1973. BIS central bankers’ speeches  more than a quarter of a percentage point (32bps).5 And while fluctuating over time, these ‘implicit subsidies’ remained sizable throughout most of the 1990s and 2000s. And indeed, expectations of bailouts were generally right. Very few banks were allowed to go into insolvency in the global financial crisis. Lehman was very much the exception that proved the rule. The impact of Lehman’s failure revealed that things had not moved on since Continental Illinois; the official machinery in most jurisdictions was completely unable to handle the failure of a large – or in the UK case even a medium-sized – banks in a way that did not pose risks to the financial system. So in most cases banks were bailed out. The risks of contagion, loss of confidence in the system and disruption to the provision of banking to the economy were simply too great. But the costs had grown since the Continental Illinois episode of the 1980s.