First, because they can only be initiated at the point of insolvency, whereas a loss of confidence in a bank by its depositors will often precede that point. Second, normal insolvency procedures are not well suited to ensuring continuity of key banking functions, particularly access of depositors to their funds, but also the provision of credit. Third, a bank failure may involve substantial negative spill over and externalities – for instance to other banks via their inter-connectedness. But in normal insolvency procedures these externalities would not be taken into account when determining what to do in insolvency. Fourth, depositors play a special role as creditors of a bank. Unlike the creditors of a typical company, they are very numerous in number, most are not professional market participants, and their claims in the bank are in the form of money. The recent experience in the UK These are therefore strong reasons for treating the resolution of banks differently. But we didn’t start in this position at the onset of the financial crisis in 2007. At the time of the start of Northern Rock’s problems, the UK did not have a special resolution regime; rather, we were relying on the tools of the past. Northern Rock was a good example of a bank that had a liquidity problem, caused by the closure of its major funding market, for residential mortgage backed securities, and had a heightened probability of experiencing a solvency problem in the future.
To date, this rise in house prices has not translated, on available estimates, into an overvaluation of residential real estate assets. That said, we must continue to monitor this market closely in case this risk materialises, and to analyse other facets of the conditions under which mortgages are granted that are less influenced by the collateral value. 24/29  A second relative facet is the effort that repaying the mortgage entails for agents that have incurred this debt. Once again, empirical evidence shows that loan-to-income and debt service-to-income ratios are relevant variables for determining the probability of mortgage default, although the low interest rate environment mitigates the risk. In any event, as more than half of new mortgage loans continue to be taken out at a variable rate, high loan-to-income ratios continue to be a source of possible vulnerability for households. However, in this instance too, mortgage lending standards appear to be prudent, with no evidence that they have recently eased. Third, an additional dimension that is also relevant for estimating the probability of default is the maturity of the mortgage loans granted. Longer maturities are usually related to more foreclosures. Likewise in this case, standards have become stricter following the crisis and have not eased in recent months. Empirical evidence further shows that it is the combination of some of these dimensions that may prompt disproportionate increases in the probability of loan default. These mortgages with very lax conditions in several dimensions have also become much less significant in recent years.