It was probably similar considerations that motivated the measures taken in Germany to save IKB and Sachsen Landesbank. Now one has seen that it was not so easy for the British authorities to manage the problems in Northern Rock. The existing regulations and arrangements did not prove particularly effective. Despite the measures taken, they did not manage to avoid a bank run. This has led to the authorities in Great Britain drawing up, in an impressively short time, proposals for a number of improvements in the regulatory framework for managing institutions in distress. In February the British finance minister announced that they had decided to nationalise Northern Rock, as there was otherwise a risk that the cost to the taxpayers would be too high. 6  BIS Review 30/2008  The regulations for managing institutions in distress are inadequate As partially responsible for the stability of the financial system, I ask myself, how are things in Sweden? Do we have the regulatory framework required to manage possible future problems? Unfortunately, the answer to that question must probably be no, at least at present. During the Swedish bank crisis at the beginning of the 1990s a number of extraordinary measures were taken. These included issuing the bank deposit guarantee. This was a general declaration that the banks’ creditors would be protected. In addition, a special crisis management authority was established, the Swedish Bank Support Authority.
It is, of course, difficult to calculate these costs. Some surveys have indicated that an average production loss resulting from a bank crisis could be around 15-20 per cent of GDP. According to some calculations, the collapse of the Swedish bank market cost around 5 per cent of GDP in terms of a loss in output. Seen from society’s point of view, the individual agents’ incentives are not sufficient to take protective measures against crises that affect the financial system as a whole. The shareholders can never lose more capital than they have put in and individual depositors find it difficult to monitor a bank with widespread operations. There are, to use economic terminology, considerable negative externalities. In addition to the consumer protection aspects, this is a decisive motive for having a financial safety net in the form of special regulation, supervision and a deposit guarantee. It is also the reason why central banks have the possibility to provide liquidity support in the form of emergency liquidity assistance. Such emergency liquidity assistance shall in principle only be granted if the institution in question has temporary liquidity problems, but is essentially robust and if there are systemic contagion risks. It was exactly this risk of domino effects in the rest of the financial system that meant that Northern Rock, which can hardly be said to be of critical significance to the bank system, became the object of a number of measures taken by the British authorities.