Master in Crisis and Security Management January 2018
Master Thesis Alastair Crooks S1928198
Supervisor - Wout Broekema Second Reader - Sanneke Kuipers Word count: 17, 749
Northern Rock and Anglo Irish: Crisis
Decision Making in the Global Financial
Contents 1) Introduction p.3 2) Theoretical Framework p.7 3) Methods p.14 4) Research Design p.19 5) Case Descriptions p.22 6) Northern Rock Analysis p.28
7) Anglo Irish Analysis p. 34 8) Discussion p.40 9) Conclusion p. 45
1)Introduction.
Perhaps the most well known depiction of a bank run is in Frank Capra’s It’s a Wonderful
Life from 1946; in which we see Jimmy Stewart as the head of a small building and loan
institution. A key scene from the film is his attempts to stop his institution from failing during a bank run, by explaining to his depositors the basic principles of banking; a stirring speech that saves the day. Of course, Hollywood isn’t reality. However, it does go some way of showing the exceptional nature of bank runs that a 71 year old film exists as the bench-mark for depicting a bank run in popular culture. The focus of this study will be partly on such an event, albeit without the benefit of a feel-good script. The purpose of this study is to attempt to reach an understanding of the main factors that influence the decision making of the strategic leadership of public organisations during periods of crisis. These strategic leaders are in positions of responsibility for crisis management, which can be defined as ‘the sum of activities aimed at minimizing the impact of a crisis. Effective crisis management saves lives, protects infrastructure, and restores trust in public institutions’ (Boin, Kuipers and Overdijk, 2013, p. 81). As such, the main factors that influence the decisions made by these individuals in key positions is a subject of importance.
This study will examine two crises, both of which occurred as smaller parts of the 2007-08 global financial crisis. The first of which is the run on, and subsequent nationalisation of, Northern Rock Bank in the UK in 2007-2008; with the other being that of the nationalisation of Anglo Irish Bank, which formed a significant part of the 2008 Irish Banking Crisis. These two crises will be compared, and the decision making of public leaders involved will be analysed. To be clear, although this paper will deal with crises that occurred in the private sector, it is the fact that the responsibility for them ultimately lay with public leaders that is of interest, and it is this that will be examined in further detail.
September 2007 saw the first run on a British bank since the 19th century, with millions of depositors withdrawing their money from Northern Rock bank. Originally established in the 19th century in Newcastle, in the North East of England, Northern Rock had, like many building societies in the UK, undergone demutualisation in the 1990s. This allowed it to take on the riskier, and more profitable, elements of banking not open to a building society, and with considerable success. ‘In the nine years from June 1998 (the first year after demutualization) to June 2007 (on the eve of its crisis), Northern Rock’s total assets grew from 17.4 billion pounds to 113.5 billion pounds’ (Shin, 2009, p. 102). And yet, within three
months from this valuation, a crisis in confidence resulted in millions of customers literally queuing up outside branches across the country, waiting to get their money out, and by February 2008 the British Government had been forced to completely nationalise the bank. With respect the aforementioned nationalisation of Anglo Irish Bank; the collapse of this institution represented an enormous blow to the Irish economy, and formed a large part of a wider crisis in the Irish economy where ‘banks went from a Celtic Tiger ‘roar’ to a stray cat ‘meow’ within a short period starting in 2008. The collapse represented the iconic story of a country having gone from boom to bust once again’ (Chari and Bernhagen, 2011, p. 475). Anglo Irish Bank also posted the largest corporate loss in Irish history, with the Irish government having to ultimately seek a bailout from the International Monetary Fund following the almost complete collapse of its domestic banking sector; of which Anglo Irish Bank was a key component. This collapse came after a period where Ireland had enjoyed very high levels of economic growth. Indeed, ‘real GDP growth averaged around 5 percent and employment increased strongly for several decades prior to 2000, as the economy benefited from a successful integration into the world economy’ (IMF, 2015, p. 4). Therefore, the nationalisation of Anglo Irish forms a key part of the story of a strong economy, brought down by its banking sector.
1.2) Research Question
‘What main factors determine the decision making of the strategic leadership of public organisations during crises?’
1.3) Study
The way in which the study will be conducted will be discussed in greater detail in the methods section. However, in brief, the two cases will be compared through the use of the Most Similar Systems model, data will be collected and analysed through document analysis of speeches, parliamentary debates and policy documents. Once the data is collected and analysed on a case by case basis, it will then be brought together and conclusions will be drawn by comparing the results of each study. In assessing the main factors that determine the decision making of strategic leaders, four independent variables will be used in the study. The conceptual definitions and indicators will also be discussed later; but they are to be; media pressure, time pressure, constitutional limitations and institutional relations. It is thought that each of these independent variables covers an important element of the broader
tasks associated with crisis management, and also that they will be possible to detect from within the data.
1.4) Societal Relevance
As was briefly mentioned in the introduction; crisis incidents, whether they be a natural disaster, a terrorist attack, or a financial crisis, have a profound impact upon societies. As such, any efforts to reach a better understanding of them, or in this instance to reach an understanding of a particular element of them, can be seen to be of value.
In addition to this point, the actual cases that are to be used in this study can be seen to be of importance, given the impact that each case had on the country in which it occurred. The run on Northern Rock Bank, beginning on 14 September 2007, represented the first run on a British bank since the 19th century. This panic by depositors, prompted by the bank’s high profile liquidity problems, eventually resulted in the full nationalisation of Northern Rock in February 2008. Commenting after the event, the then Chancellor of the Exchequer Alistair Darling recalled his reaction to the scenes of queues forming outside Northern Rock branches across the country; ‘What I had witnessed on television that day was potentially disastrous for Northern Rock, for other banks, and for the economy… Politically it was potentially fatal… It was going to take a Herculean effort to turn things around’ (Darling, 2012, p. 14).
In terms of the Irish situation, the crisis resulted in a major economic shock, and ultimately an IMF bailout. As stated by the chair of the Joint Committee of Inquiry into the Banking Crisis, Ciaran Lynch;
‘The banking crisis will be seen as a defining event in Irish history. Its dark cloud still lingers over every home in Ireland and many are still suffering from its impact today. Unemployment, emigration, unsustainable debt, negative equity and home repossession are among the legacies of the crisis. As the Celtic Tiger fell, our our confidence and belief in ourselves as a nation was dealt a blow and our inter- national reputation was damaged’ (Lynch, 2016, p.3).
As a whole, Ireland’s economy shrank by 3 per cent in 2008 and 7.5 percent in 2009. It also resulted in the country running a 14.3 per-cent deficit in 2009. In short, both nationalisations were major events of national significance. It is thought therefore, that a fresh approach to the
crises may yield a better understanding of the decisions made by the leadership of the relevant public organisations at the time, and to provide a renewed assessment of those decisions, and more importantly of the factors that influence the decisions taken during the height of the crises. Furthermore, almost a decade has now passed since these events; giving the opportunity to develop conclusions based on how events played out with the benefit of hindsight not available to actors at the time.
1.5) Academic Relevance
As will be discussed in more detail in the literature background, scholarly work on the leadership of public organisations during times of crisis is well covered. However, much less exists in terms of linking the leadership of public institutions during crises of a financial nature, decision making and crisis management. It may seem that this link is counterintuitive, given that the theories discussed are related to public organisations and that financial crises are concerned with mainly with publically limited companies. However, because the state is ultimately seen as being responsible for the management of a crisis of any nature, it is therefore important to study the link between the theories that exist on decision making during crisis, and a crises that are of a different nature than the usual academic fare.
For instance, much of the academic discourse on decision making during crisis to date that has focused upon strategic leadership has done so through the lens of international affairs crises. For instance, one of the most widely used books on this subject Essence of Decision by Allison and Zeliow (1999), seeks to assess crisis decision making during the Cuban Missile Crisis. It is because of this fact that it is thought to be important to approach the question of decision making during crisis by a more unusual route, and by using cases that have to date not been studied through this lens.
2) Theoretical Framework
In terms of the literature background for this paper, one must start with work on the leadership of public organisations during periods of crisis, before funnelling in specifically on decision making. As such, this section will begin with crisis management, before examining leadership, decision making and then the independent variables of the study.
Crisis Management
There is a consensus that exists, which dictates that while all crises are different there are common factors which unite them. In this view, crises can be defined as being incidents demonstrating ‘episodic breakdowns of familiar symbolic frameworks that legitimate the pre-existing sociopolitical order’ (Boin, t’Hart, and McConnell 2010, p. 3). As such, in order to mitigate the impact of such breakdowns, whether they be a terrorist incident, natural disaster or indeed a financial crisis, requires some form of crisis management. The concept of crisis management, and effective crisis management at that, is seen to be of growing importance as; ‘the modern crisis is the product of several modernization processes—globalization, deregulation, information and communication technology, developments and technological advances, to name but a few. These advances promote a close-knit world that is nonetheless susceptible to infestation by a single crisis’ (Boin and t’Hart, 2003, p. 545). Therefore, it is deemed to be necessary to have effective leadership of a crisis management operation, in order for it to be successful and the worst aspects of the crisis to be avoided or resolved quickly.
Strategic Leadership
Before discussing the literature on the leadership of public organisations during crises, it is important to note that a distinction exists between the different types of leadership that can be studied, those of operational and strategic leadership. As has been discussed, the focus of this study will be on strategic leadership, that being succinctly defined as ‘the overall direction of crisis responses and the political process surrounding these responses’ (Boin et al. 2005, p. 10). This is as opposed to tactical or operational leadership, dealing with decisions on the ground, and without having to consider the wider ramifications to the whole crisis. For instance Boin et al see this distinction, between strategic leadership and tactical/operational leadership as more important that the nature of the crisis itself. They argue that it does not matter what the type of crisis is, as the ‘challenges for leaders in dealing with these threats are
essentially the same: trying to prevent or at least minimize the impact of adversity, deal with the social and political consequences, and restore public faith in the future’ (Boin et al. 2005, p. 4).
In terms of the existing literature on the subject of strategic leadership during crises, much has been written on the ways in which an assessment framework can be drawn up for the leadership of public organisations. Indeed, as is stated by Quarantelli, ‘our assumption is that what is crucial is not management per se, but good management’ (Quarantelli, 1997, p.39). However, as t’Hart has stated, there are plenty of how-to books on the subject, but the majority of these are ‘grounded in the personal, idiosyncratic experiences of veteran leadership practitioners and the pet models of senior consultants’ (t’Hart, 2011, p.325). This is important to address as ‘without a proper normative grounding and systematic evaluation processes, leadership prescriptions are prescriptions without a diagnosis’ (t’Hart, 2011, p.324). With reference to what leaders of public organisations actually do during a crisis, Boin states that leaders ‘must supervise operational aspects of the crisis management operation, communicate with stakeholders, discover what went wrong, account for their actions, initiate ways of improvement, and (re)establish a sense of normalcy’ (Boin, 2005, p.1). On a broader level, Boin, Kuipers and Overdijk see the management of a crisis as being ‘the sum of activities aimed at minimizing the impact of a crisis’ (Boin, Kuipers and Overdijk, 2013, p.81). Indeed, McConnell, Boin and t’Hart have argued that the role of leaders can, and should, be examined right through a crisis; from its origins to after it has ended. This is important as the accountability of those in power is a key component of the modern liberal democracy.
Following on from the thinking of McConnell, Boin and t’Hart, in taking a crisis situation from the beginning through to its end, Boin, Kuipers and Overdijk seek to address questions of ‘how can we assess leadership performance during a crisis or disaster? What can we reasonably expect from leaders at the strategic or political level? How important is their role as crisis manager?’ (Boin, Kuipers and Overdijk, 2013, pp. 80-1). In addressing these three questions the authors highlight ten executive tasks of crisis management, running from early recognition to enhancing resilience once the crisis situation has subsided. It is argued that these tests provide a comprehensive view of crisis leadership, and ‘the resulting assessment is likely to be fair and to take into account the difficult conditions under which crisis leaders operate’ (Boin, Kuipers and Overdijk, 2013, p.87). As such, by using these ten tasks of crisis
management as a means to assess strategic leadership performance during a crisis, a balanced judgement can be reached.
Decision Making during Crises.
What is clear from the general literature seeking to find a framework for judging the performance of leaders during crises, is that decision making is fundamental to effective crisis management. In articulating decision making as one of the ten executive tasks of crisis management, Boin, Kuipers and Overdijk state that ‘crisis management has often been analyzed in terms of decision making. At the strategic level, making critical decisions - those that should be made at the highest level - is indeed an important, sometimes crucial task’ (Boin, Kuipers and Overdijk, 2013, p. 83). There are already some authors who have concentrated more specifically on this field. A workable definition of what constitutes the classic interpretation of decision making during crisis is provided by Boin et al; ‘making the critical call when it matters most. Both successes and failures of crisis management are often related to such monumental decisions’ (Boin et al, 2005, p.42). Boin et al also look to explain decision making factors, and the role that leaders play as crisis decision makers. Such decision making factors as experience are assessed, with it being deemed that ‘crisis teams are more likely to perform effectively in communities or governments where certain types of crises are recurring rather than rare phenomena’ where the ‘key policy makers and agencies are thus more likely to have meaningful experience working together’ (Boin et al, 2005, p. 49).
Of course, much of the literature does not merely discuss decision making in theoretical terms alone. This is, of course the purpose of the study; to bring together theoretical interpretations of decision making during crises, and to examine what main factors determine that decision making. This is a subject that has already been covered in general terms, but as was mentioned in the introduction it is a subject that has usually been covered from an international affairs perspective. For instance, in using the Cuban Missile Crisis as an example, Allison and Zelikow seek to explore decision making during crises by using three conceptual lenses to explain the actions of leaders. The first of which is the Rational Actor Model, in which those analysing the crisis ‘show how the nation or government could have chosen to act as it did, given the strategic problems it faced’ ‘the analyst invokes certain patterns of inference: if the nation performed an action of this sort, it must have had a goal of this type’ (Allison and Zelikow, 1999, pp. 4-5). Alongside the Rational Actor Model, Allison
and Zelikow set out Organizational Behaviour, in which the organisational structure of institutions is key; what Rational Actor Model ‘analysts characterize as “acts” and “choices”
outputs of large organizations functioning according to regular patterns of behaviour’
(Allison and Zelikow, 1999, p. 6). Finally, ‘the third model focuses on the politics of a government … what happens is understood as a resultant of bargaining games among players in the national government’ (Allison and Zelikow, 1999, p. 6). What is key in the different conceptual lenses used by Allison and Zelikow to understand decision making is that the ‘use of a microscope, rather than a telescope, produces a different image of the same fundamental reality’ (Allison and Zelikow, 1999, p.380).
In a similar study on decision making during crises, by Herek Janis and Huth, the claims made by Allison and Zelikow are contradicted; particularly that of the Rational Actor Model. Herek et al. state that it is a mistake to view decision makers as purely rational actors, given that as ‘we can neither predict the future nor know every alternative course of action in most cases, human beings cannot fully meet the requirements of a normative national model’ (Herek, Janis and Huth, 1987, pp. 203-24). As such, they produce a hypothesis on decision making during crisis based upon the idea of so-called ‘vigilant problem solving’, an approach that includes factors such as ‘gross omissions in surveying alternatives, gross omissions in surveying objectives’ or ‘failure to examine major costs and risks of the preferred choice’ (Herek et al. 1987, p. 204). The authors argue that the adoption of this approach is the best way to guarantee effective decision making during a crisis and that ‘the more steps of vigilant problem solving that are adequately carried out, the lower the probability of undesirable outcomes from the standpoint of the organization or nation’ (Herek et al. 1987, p. 206). In addition to this, Herek et al do not leave the situation at that; and do acknowledge that an understanding of decision making of one side alone cannot fully inform the outcome of a crisis. This is achieved by concluding that in a crisis situation ‘the outcomes result from a combination of the leaders’ decision making and implementation, external variables including the decisions made by adversaries, and chance factors’ (Herek et al. 1987, p. 221). Now of course, both of these examples are studying international crises in the national security sphere; whereas the focus of this particular study is of crises involving financial institutions requiring state intervention. However, there does exist a significant amount of crossover between the variables that are to be discussed below, and the factors that are discussed in the studies of Allison and Zelikow and Herek et al.
Independent Variables - Media Pressure, Time Pressure, Constitutional Limitations, Institutional Relations.
The choice of each independent variable will be addressed in more detail in the coming sections, with each being taken in turn alongside crisis decision making. However each independent variable has a basis in literature and will therefore also be discussed in this section.
In the first instance, media pressure is a key feature of the modern crisis, with Boin et al. stating that ‘the massive media onslaught that is the hallmark of contemporary crises guarantees that questions of responsibility, accountability, blame and compensation will be on the agenda’ (Boin et al. 2005, p. 150). This pressure is particularly keenly felt if the strategic leader is seeking to ensure that they have some control over the narrative of the crisis, as after a crisis ‘The search for explanations—how could this have happened?—often degenerates into blame games. Media appoint winners and declare losers. Political inquiries tend to be preoccupied with the unearthing of failures, especially those that might explain why the crisis was not prevented in the first place’ (Boin, Kuipers and Overdijk, 2013, p. 80). Therefore, it is seen to be of particular importance in the modern crisis for leaders to consider how the crisis is perceived in the media, if they want to avoid blame for causing the crisis or for responding in a manner not sufficient to the threat. This point is elucidated by Kuipers and Brandstorm, who state that ‘When actors engage in a framing process in the wake of a problem or failure, part of this process, and especially the initial steps, are probably no more than a reflex and unconscious response. But in many cases, actors in the political arena will discern clear opportunities and threats to their position or organization.’ (Kuipers and Brandstorm, 2003, p. 304). Therefore, based upon this information; for this study media pressure will have a conceptual definition as the extent to which mass media coverage determined decision making during a crisis and the timings and presentation of those decisions. In terms of how this media pressure is expected to have an influence on decision making during crisis, as was stated in how it is seen to be present in the theory, media pressure will drive strategic leaders to want to appear to have control of a crisis; even if they do not in fact.
In addition to this; time pressure is also seen as being a key factor, and one that influences decision making to the extent that whatever decisions are taken must be made in the ‘eye of
the storm’ of the crisis. As stated by Boin et al; ‘Choices have to be made relatively quickly; there is time pressure - regardless of whether it is real, perceived, or self-imposed - which means that some of the tried-and-tested methods of preparing, delaying, and politically anchoring difficult decisions cannot be applied’ (Boin et al. 2005, pp. 43-44). Furthermore, it can be argued that without the element of time pressure, a particular situation cannot be deemed to be a crisis in the sense of requiring the previously described leadership. Indeed, Rosenthal and Pijnenburg argue that time pressure is central to any understanding of crises and thus crisis decision making, by stating ‘the concept of crisis related to situations featuring severe threat, uncertainty, and a sense of urgency’ and that because of this sense of urgency ‘crisis decision making is mostly seen as a function in the response phase of crisis management’ (Rosenthal and Pijnenburg, 1991, p. 3). The conceptual definition of time pressure of this study will be the extent to which the immediacy of the crisis, and the period available for decision making contributed to what decisions were made, and when. In the instance of these two cases, because they both relate to modern financial crises, the time pressure that is being referred to is real and not perceived. This is due to the fact that the decisions being made by the strategic leaders were market sensitive, and therefore were inextricably linked to time pressures.
A significant constraint on the ability of the strategic leader of a public organisation during a crisis is that of constitutional limitations on their power; in other words being legally entitled to carry out any necessary action as they see fit to address the crisis situation. This concept of constitutional limitations on power is bound up in questions of accountability during a crisis situation; as Boin et al argue, it is often the case that the ordinary decision making process is suspended during a crisis, which is followed by a period where ‘The rule of law and the constitutional checks and balances on executive power reassert themselves after a period where the need to respond effectively to a perceived threat has dominated all other considerations’ (Boin et al. 2005, p. 102). Therefore, constitutional limitations will be defined as the extent to which strategic leaders are able to act unilaterally during a crisis, without seeking further legislative approval, and without having to undergo checks and balances. It is expected that this will be present in both cases, and that considerations of what actions are immediately available to these leaders will have been a contributing factor to decision making during both cases.
Furthermore, one additional aspect of the modern crisis situation is the number of institutions involved in efforts to bring the crisis to a satisfactory resolution. As such, it can be argued that any form of institutional relations can have a profound impact on the resolution of the crisis in question. One way of looking at these institutional relations would be to understand it as a politicisation of the decision making process. Whereas in theory institutional actors in a crisis situation will be working towards the same goal, ‘in reality, other considerations enter the picture, and may foster imbalances or incorporate conflict into the group process… A leader’s personal needs, sentiments, and calculations typically affect who is in and who is out of the loop during a crisis’ (Boin et al. 2005, p. 48). Therefore institutional relations can be seen to be the coordination that exists between the key actors in the management of a crisis situation; and in the case of this study the extent to which these relationships have an impact on decision making. It is thought that these institutional relationships will be key to the results of this study, because of the composition of the modern state no single government agency or department acts alone, and without the cooperation of others. Therefore, the working relationships between these departments will be seen to be key; as will these relationships on the determining of decisions made during each crisis.
3) Methods 3.1) Research Method
This study will take the form of a comparative case study, in order to provide a more comprehensive understanding of the two crises. It is thought that allowing a deeper study of both Northern Rock and Anglo Irish will allow for broader conclusions to be drawn from the research question, and to provide a real-world example of the challenges facing strategic leaders during crises. A definition of a case study, provided by Yin, is that; ‘the essence of a case study, the central tendency among all types of case study, is that it tries to illuminate a decision or set of decisions: why they were taken, how they were implemented, and with what result’ (Yin, 2003, p. 12). More broadly, the use of case study research is of use as it ‘is an in-depth exploration from multiple perspectives of the complexity and uniqueness of a particular project, policy, institution or system in a “real life” context. It is research based, inclusive of different methods and evidence-led’ (Simons, 2014, p.6). In this instance, it is necessary to think of the comparative case study method being used in an instrumental manner, that being one ‘in which we choose a case(s) to gain insight into a particular issue (i.e., the case is instrumental to understanding something else)’ (Simons, 2014, p. 9).
It is thought that due to the similar nature of the crises; that both formed a part of the wider global financial crisis, occurred in neighbouring countries, and began in the private sector yet became the ultimate responsibility of the state, the use of the Most Similar Systems Design (MSSD) would aid the research and allow more valid analysis of data. This is because, the MSSD method ‘we choose as objects of research systems that are as similar as possible, except with regard to the phenomenon, the effects of which we are interested in assessing’ (Anckar, 2008, p. 389). While the UK and Ireland differ in population size and GDP, The MSSD model is applicable to the two examples of the Northern Rock crisis and the Irish banking crisis. Not only are the subject matters of the crises similar, the UK and Ireland have a shared history, language and border. They also enjoy, at the time of writing, a common travel area and are key trading partners.
It is intended that the actual study will be carried out using a mixed methods approach, or triangulation of methods, that being a study that ‘mixes the qualitative and quantitative approaches and data… a study of that combines both tends to be richer and more comprehensive’ (Neuman, 2014, p. 167). Within this mixed methods approach, primary reliance will be placed on a content analysis of relevant government documents, speeches
from key players, the data universe is discussed below. Furthermore, in order to complement this approach and provide validity to any conclusions, a discourse analysis of a smaller number of key documents will be used, in order to provide a more detailed understanding of the topic. Finally, in addition to these methods, at least one interview will be carried out with Members of Parliament serving during the period covering these crises. However, given the fact that the author’s access to these interviews may be limited to a very small number, this method will merely be used to complement those previously mentioned.
3.2) Data Collection and Analysis
With regard to the data that is to be collected, In the aftermath of the two crises several policy were produced, both within the British and Irish Parliaments and by external actors.To be clear, these policy documents are to be collected from HM Treasury, the Bank of England, and from the House of Commons.With respect to the Northern Rock case, the most high profile, and probably most relevant to this research, is The run on the Rock produced by the House of Commons Treasury Committee in January 2008. However, this report was published before the full nationalisation of the bank and will, of course, be used in tandem with a range of other materials, as it does not cover the entire period of study for this case. Indeed, it is important to note that the policy documents that are to be used in this case were almost all produced after the period of study; that being from the run on Northern Rock in September 2007 through to its nationalisation in February 2008.
In addition to these policy documents, statements made by the Chancellor, Alistair Darling, to the House of Commons during the crisis period will be analysed. Of course, it is not expected that these will yield the deepest secrets of how decisions were made, what process was undertaken, and what conflicts arose during the process; particularly given the fact that the future of Northern Rock was a ‘live’ political issue at that point. However, the statements given to Parliament will provide a more ‘real time’ perspective on how the crisis unfolded, and will provide perspective to the more in depth policy documents produced in the immediate aftermath of nationalisation in February 2008.
Moreover, in the case of Anglo Irish, policy documents produced in the aftermath of the crisis will be used, as will reports from the Oireachtas (the Irish Parliament), speeches and statements by ministers, and the official report of the Commission of Inquiry into the Systemic Banking Crisis in Ireland. The reports of the Oireachtas and the Banking Inquiry
will be of particular value to the study; as they are both in great detail, cover the crisis beyond the focus of this study, and had access to individuals that it would not be possible to contact for this study. Furthermore, in using similar sources for each crisis, that being speeches by the strategic leadership of the public institutions involved in the Northern Rock and Anglo Irish crises, and policy documents, it is thought that better comparative analysis of the two cases will be possible.
So, in exact terms, the documents used for each study are listed below in the following tables: Northern Rock
Document No. Source
Speeches 5 House of Commons
Hansard, Speeches by
Alistair Darling, Oct 07 - Feb 08.
Policy Documents 1 HM Treasury
Government Reports 3 House of Commons Library,
National Audit Office,
House of Commons
Treasury Committee Anglo Irish
Document No. Source
Speeches and Debates 2 Houses of the Oireachtas
Government statements 3 Irish Government
Government Reports 2 Joint Committee of Inquiry
into the Banking Crisis
These documents are key to providing an overall understanding of the two crises. Of course, the documents that would be of most use to this research are the minutes of meetings between the key players during each crisis. However, it is the policy of both the United Kingdom and the Republic of Ireland to not release the most sensitive, and thus most illuminating,
documents until 30 years after the event. Therefore, the previously mentioned sources will be used in the study, as they provide the best available research option prior to the release of the most sensitive documents.
3.3) Challenges and Limitations
Despite the fact that this study is to examine the factors influencing the consensus of decision making during two particular crises, it is worth returning to the work of Herek et al. who acknowledge the difficulty of establishing a difference between causation and correlation when studying crisis decision making. From a hypothesis which predicted that; ‘for consequential decisions that implicate vital interests of an organization or nation, use of a problem-solving approach with judicious information search and analysis (within whatever constraints are imposed by limited organizational resources) will generally result in fewer miscalculations and therefore better outcomes than any other approach’(Herek et al., 1987, p. 206), it was deemed that although there was a correlation between whether decisions were reached in this manner and a positive result, it was not possible to determine that this was causational as opposed to a mere correlation.
Despite the fact that the crises being examined in this study are of a different nature to those studied by Herek et al., that being international affairs crises during the Cold War, the same cautiousness must be exercised when seeking to draw conclusions from the data that is collected. As such, the research question is worded in such a way as to indicate that the purpose of this study is not to find the factor that determines decision making. Rather, the purpose and intention of the study is to attempt to reach a deeper understanding of the main factors.
3.3.1) Validity and Reliability
The validity of this study can be assessed under two measures, that of internal and external validity. In a broader sense, the validity of a study refers to how true the results of a study can be seen to be; with internal validity meaning that there are no ‘errors internal to the design of a research project that might produce false conclusions’ (Neuman, 2014, p. 221). External validity ‘refers to whether we can generalize a result that we found in a specific setting with a particular small group beyond that situation’ (Neuman, 2014, p. 221); in terms of this study that means that external validity will be high if broader conclusions on the factors determining decision making during crisis can be drawn from the examples of Northern Rock
and Anglo Irish. Given what has been stated about the challenges and limitations of the study, it is expected that internal validity will be high, given the in depth nature of the study, and that external validity will be somewhat lower. However, it is expected that broader conclusions will be able to be made, but that those conclusions should be considered to be taken with ‘a pinch of salt’.
In terms of the reliability of a particular study, this refers to the fact that ‘other researchers can produce the study and will get similar results’ (Neuman, 20114, p. 221). In this instance, because of the fact that the data is being collected and analysed in a qualitative manner, the key word here is similar. It is not expected that this study would be able to be repeated and exactly the same conclusions would be drawn, or that exactly the same inferences would be seen when analysing the data. However, when using the word similar, as opposed to the same, it is thought that the reliability of this study will be high.
4) Research Design
4.1) Justification of Cases
Despite its relatively small size, when compared to some of the larger financial institutions that collapsed or required government bailouts, Northern Rock is of interest because it was the first such institution to face the difficulties that were later to become systemic in most advanced economies. Indeed, the collapse of Northern Rock was ‘described at the time of its collapse as an example of an aggressive business model employed by naive management, it is now clear that Northern Rock marked the beginning of and provides insights into the credit crunch and wider global banking crisis’ (Marshall et al, 2011, p. 157). There are, of course, other examples that could have been chosen to conduct the same study. Other financial institutions required government assistance in the UK, some of which were larger and more consequential to the overall health of the British economy. However, it was the arresting effect that the physical run on Northern Rock had in the public psyche that made the selection of this case most persuasive.
With respect to Ireland and the case of Anglo Irish Bank, this instance was part of a crisis that had a much more profound impact domestically than did Northern Rock to the UK. Anglo Irish also, as was stated earlier, posted the largest corporate loss in Irish history before its nationalisation. Indeed in terms of the wider Irish banking crisis of which Anglo Irish was a major constituent part, Chari and Bernhagen ‘not that the impact of the crisis in Ireland was as significant (perhaps even more so in terms of its long-term impact on the future of the country) as that suffered by liberal market economies (LMEs) such as the UK and the USA’ (Chari and Bernhagen, 2011, p. 485). As with Northern Rock, other examples could have been chosen, however as will be discussed in further detail in the methods section, it is thought that studying these two cases concurrently will provide a more illuminating study.
4.2) Operationalisation
A useful guide for the term operationalisation is, ‘the process of moving from a construct’s conceptual definitions to specific activities or measures that allow a researcher to observe it empirically’ (Neuman, 2014, p. 207). The conceptual definitions for the 4 independent variables - media pressure, time pressure, constitutional limitations and institutional
relations - have already been elucidated earlier. However, it is important to explain precisely how these will be sought, and how the documents used will be coded during the study. The unit of analysis in this study will be paragraphs, which will be coded in each document according the the category within which they fall. Key points from within the documents will then form the basis of the analysis the is to follow; after which the data from both cases will be compared prior to the conclusion of the study. It is important to note that in the case of some documents, much of the contents will be uncodable, given that the focus of some of the policy documents extends to beyond the two cases. For instance, the Joint Committee of Inquiry into the Banking Crisis covers the Anglo Irish case in detail; yet it extends to three volumes and covers the entire Irish Banking Crisis. As such, the vast majority of that document is not relevant to this study, and is therefore uncodable.
In terms of the indicators that will be sought, key words relating to each independent variable will be looked for, some of which are included in the table below;
Term Conceptual Definition Examples of indicators
Media Pressure The extent to which mass
media coverage was a consideration during the decision making process.
Use of words; media,
newspapers, coverage,
commentary
Time Pressure The extent to which checks
and balances exist, limiting the ability of public leaders to act unilaterally.
Use of words; time, markets, immediate, as soon as possible
Constitutional Limitations The extent to which the
immediacy of the crisis, and the period available to decision making, impacted on the decisions ultimately made.
Use of words; legislation, legal, provisions in place, contingency
Institutional Relations The extent to which
inter-departmental or
inter-organisational rivalries and
working relationships
impacted on the response to the crisis.
Use of words; negotiations,
departments, liaise,
5) Case Descriptions
Now that the purpose of this study has been discussed, and that the case selection and methods have been justified, it is thought to be prudent to discuss each case in more detail in order to aid in an understanding in the analysis of the results and conclusions that are to be made. Therefore, the case of Northern Rock will be addressed in more detail followed by that of Anglo Irish. To be clear, and as has already been stated in previous sections, the interest of this study is in the decisions made during the crises themselves, and not at what impact those decisions had in the longer term. Despite this, the following sections will take a broader view of the crises, to allow for a greater understanding of each case. Therefore the purpose of this chapter is not to consider or analyse decision making in each case by the British and Irish governments; rather it is to allow a greater understanding of the context within which each case occurred to allow an analysis of the data in the next chapter.
5.1) Northern Rock
As has briefly been discussed in the introduction, Northern Rock was a central institution to the economy of the North East of England, and prior to the crisis the bank was ‘only one of two FTSE 100 (companies) headquartered in the North East’ (HoC Treasury Committee, 2008, p. 10). This importance was reached from relatively humble beginnings as a building society, with the institution having undergone rapid expansion from 1997, when it underwent the process of de-mutualisation, allowing it to expand as a retail bank and to take on more risk, and thus expand its potential growth. However in order to fund this rapid growth in the decade to 2007, ‘Northern Rock became reliant on wholesale lenders such as other banks and on selling, rather than retaining, the mortgages it had already issued. In August 2007, credit concerns stemming from bad debts in the US mortgage market caused banks to curb their lending to each other (HM Treasury, 2009, p.4). In other words, the bank was having to take on more risk to fund its operations in what was to prove to be a sector that was to have disastrous implications for the world economy, the US sub-prime mortgage market. Therefore, because of this loss of confidence ‘Northern Rock began to experience problems in raising short term funds and rolling over existing loans from wholesale lenders.’ (HM Treasury, 2009, p.4). This halting of inter-bank lending was known as the ‘credit crunch’ and was an event that had a particular effect on Northern Rock, due to the business model just described. Writing retrospectively on Northern Rock’s expansion prior to 2007, Marshall et al. conclude that with respect to Northern Rock’s growth ‘the inherent fragility of its balance
sheet could not withstand the markets shift away from lending to or buying from mortgage lenders after the revelation of difficulties in the American sub-prime mortgage market’ (Marshall et al. 2011, p. 162).
It was at this point, in August 2007, that the first conversations between the institution and the British authorities took place, those being the so-called tripartite system of financial regulation; HM Treasury, the Bank of England and the Financial Services Authority. Each institution took responsibility for a different section of the financial services sector, by with the Chancellor of the Exchequer, the British Finance Minister and departmental head of HM Treasury, being ultimately accountable for the system’s success, or otherwise. During these discussions, ‘the FSA, the Governor of the Bank of England and the Chancellor of the Exchequer all indicated that they actively sought or favoured a solution to Northern Rock’s problems prior to the run through a private sector takeover’ (HoC Treasury Committee, 2008, p. 53), however this was not a solution that was forthcoming. And so, it became clear by September that Northern Rock was to require emergency assistance from the Bank of England, information that was leaked prior to its formal announcement, planned for September 17th 2007. It was this leak of information, announcing support for Northern Rock, that has been come to be seen as the catalyst for the beginning of the run on the bank. Indeed, the then Chairman of the Financial Services Authority, Sir Callum McCarthy, stated;
‘It was extremely unfortunate that the information leaked because it meant that instead of this being put in place, as “This is solvent institution which has a cash flow problem and the Government is stepping in to make sure it is saved’, it became a panic measure or a response to something that was already in the making. Panic was how it was seen’ (HoC Treasury Committee, 2008, p. 65).
The resulting depositor panic was summed up by the Chancellor Alistair Darling thus;
‘Twenty years ago this (the run) would have been reported on the 9 o’clock news or in the newspapers the following morning, with a natural break between the events as they were reported. But now, rolling 24-hour news coverage meant that images of people queuing outside branches appeared on television in a never-ending loop. Each report fed off another, ratcheting up the tension’ (Darling, 2012, p. 25).
Therefore in actual fact it was at this point, rather than when queues began to form outside branches in September, that the crisis for Northern Rock can be seen to have begun; in that it already required the assistance of the Bank of England and the Treasury one month before depositors arrived outside the doors to withdraw their savings. And yet, the enduring image from the crisis was that of depositors patiently waiting outside Northern Rock branches across the country to withdraw their savings. As stated by Alistair Darling, the leadership of the Treasury therefore had to face the challenge of stopping the run, before returning to the broader problem of the bank. Darling later said that the first problem facing the Treasury was ‘how to stop the queues… we agreed that we had to try to find a buyer for Northern Rock. Before that, we had to provide a guarantee that every penny of savers’ money was safe. That meant a government guarantee, with no qualification’ (Darling, 2012, p. 27).
So, the immediate crisis began to subside from September 17th, after the announcement by that the British Government ‘would put in place arrangements that would guarantee all the existing deposits in NRB (Northern Rock Bank) during the current instability in the financial markets’ (HoC Library, 2008, p.5), a move that was strengthened in October with the announcement of extending government protection to depositors’ money under the Financial Services Compensation Scheme (FSCS). ‘The change to the FSCS meant that all deposits up to £35,000 would be covered by 100% protection. Previously 100% of the first £2,000 and 90% of the next £33,000 were covered - a total of £31,700’ (HoC Library, 2008, p. 6), a move which was further aimed at restoring depositor confidence. This announcement had the desired effect of halting the physical run on the bank, and the panic amongst depositors subsided. However, the problem still remained as to what to do with Northern Rock, a bank which had lost the confidence of both the international financial markets and its customer base.
The first preference of the Treasury was to find a private sector solution for Northern Rock; in other words a buyer. However, Darling later stated that in terms of those private sector options ‘all the prospective purchasers wanted the government to take too much of the risk if things went wrong’ (Darling, 2012, p. 65).
The final result of the Northern Rock crisis occured in February, when ‘following a protracted period of uncertainty during which the government searched for a private sector buyer, on 17 February 2008 the Chancellor took the dramatic step of announcing that
Northern Rock would be taken into public ownership’ (Marshall et al. 2011, p. 161). As such, an institution that had its roots in the 19th century, and had been a regional building society in the relatively recent past had undergone a true story of ‘boom and bust’.
5.2) Anglo Irish
Now that the Northern Rock case has been discussed in more detail, it is necessary to give the same treatment to Anglo Irish Bank and to describe the case in greater depth. As may have become clear to the reader in the preceding chapters, the case of Anglo Irish has been more often conflated to the entire Irish banking crisis than Northern Rock to the banking crisis in the United Kingdom; the reasoning behind this will become clearer once the Anglo Irish case has been discussed in more detail; but in short this is because of the fact that the nationalisation of Anglo Irish occurred at the same time as other Irish institutions required governmental assistance, whereas Northern Rock acted as a sort of ‘canary in the mine’ to the wider British banking crisis that was to occur in 2008. So, this section will start with the broader crisis in Irish banking, through the prism of Anglo Irish Bank, and then look at what actions were taken by the Irish government during the crisis. Anglo Irish Bank had, in a similar manner to Northern Rock, relatively humble beginnings given the role it was later to play in bringing the Irish government to a point where it required international assistance to function. ‘Set up in 1964 and listed in 1971, it grew slowly and steadily as a specialist commercial property lender, to the point where it finished 1999 with a respectable EUR7.7bn loan book and EUR89m pretax profit’ (Philips, 2011). As with Northern Rock, the growth Anglo Irish experienced during the first decade of the 21st century was remarkable; ‘by the end of 2008, its loan book had grown to EUR72bn of mainly commercial property and residential development lending. In 2007 its pretax profit was EUR1.2bn, up 46% on the previous year, and its return on equity was 30% - virtually unheard of for a bank’ (Philips, 2011).
As demonstrated by these figures, and in a similar manner to Northern Rock, Anglo Irish Bank had undergone a significant change in its operations; and in the preceding decade to the crisis it ‘had transformed from being a small player in the Irish marketplace to becoming a serious player in terms of market share in chosen segments in Ireland’ (House of the Oireachtas, 2016, p. 31). In a further similarity with Northern Rock, the years immediately preceding the crisis were extremely profitable for Anglo Irish, with ‘the property-related lending strategy achieving exceptional returns over the period 2002-2008’ in a period where
‘the bank was revered by shareholders, analysts, rating agencies and commentators in Ireland and overseas’ (House of the Oireachtas, 2016, p. 45). The success of Anglo Irish was one that was reflected in the wider Irish economy; with it being termed at the ‘Celtic Tiger’ for its success. In the period described, ‘there was a broad consensus that Ireland’s rapid growth was not only based on favourable conditions but also predicated on good policies. In particular, its outward-oriented trade and industrial policy, membership of Economic and Monetary Union and favourable demographics were praised for creating a period of remarkable economic growth’ (Breen, 2012, p. 434).
However despite this success in the previous decade, ‘by 2008 it was becoming clear that the wider Irish economy was facing difficulties. The subprime mortgage crisis in the United States, triggered by a dramatic rise in mortgage foreclosures, had substantial adverse consequences for banks and financial markets globally as inter-bank lending began to seize up’ (Quinlan, 2010, p. 291). This problem was in part down to the success of the Irish economy in previous years, with the IMF noting the complacency that developed based upon a system of ‘weak regulation, supervisory oversight, and enforcement as well as growing competition (which) contributed to a weakening of underwriting standards and lowering of interest margins’ (IMF, 2015, p. 5). This was to prove to be a particularly large problem for Anglo Irish, who had based their business strategy on the continued growth of national and international property markets; with the bank having ‘accumulated huge risks and fuelled the Irish commercial real estate bubble by lending to real estate developers and investors the entire value of their project, while these investors had insufficient means to participate in the investment upfront’ (Galand and Gort, 2012, p. 264). Therefore, when the crash arrived, Anglo Irish were particularly exposed to it; and arrive it did.
By the Autumn of 2008, it was abundantly clear that the entire Irish banking system was at the point of collapse; and that the aggressively expansionist of Anglo Irish during the previous decade meant that it would require state intervention. The result of this situation was that on September 29th 2008 the Irish government announced that it was ‘to provide a comprehensive government guarantee in respect of nearly all the financial liabilities of the domestic Irish banking system’ (Donovan and Murphy, 2013, p. 3); this guarantee covered six major institutions of which Anglo Irish was one. It was intended that this original guarantee would be enough to allow Anglo Irish to continue trading, however after the guarantee was announced ‘in a somewhat ominous sign, the share prices of all the Irish banks
continued to fall steadily’ (Donovan and Murphy, 2013, p. 3). Indeed, such was the precarious position of Anglo Irish that ‘the possibility of nationalization Anglo surfaced at some stage on 29 September’ as at the point of the original bank guarantee ‘it was the institution under the greatest pressure, threatening to ‘take the other banks down’’ (Donovan and Murphy, 2013, p. 3). Such was the threat caused by Anglo Irish to other institutions, that representatives from other institutions met with the Irish Taoiseach (Prime Minister) ‘to urge unspecified ‘action’ with respect to Anglo. From their perspective, Anglo’s reputation was causing adverse contagion effects for Irish banks in general’ (Donovan and Murphy, 2013, p. 17).
Less than four months after the original guarantee, on January 21st 2009, Anglo Irish was nationalised. The cost of this to the Irish state was considerable; with the bank requiring ‘four State recapitalisations spread over 2009 and 2010 for an amount of €29.3 billion and State guarantees on most of its liabilities. In addition the Irish National Asset Management Agency .. bought €35 billion of impaired loans from the bank’ (Galand and Gort, 2012, p. 264). This was not just a tremendous monetary cost to the Irish taxpayer, with the nationalisation of Anglo Irish having very real consequences for ordinary citizens. ‘State spending would need to be slashed, including a public service pay cut of 20 per cent and a freeze on promotions in the public sector’ (Chari and Bernhagen, 2011, p. 475). This cost, combined with the collapse in tax receipts for the Irish exchequer eventually resulted in the previously mentioned support package given to the country by the IMF in 2010. As such, the collapse and nationalisation of Anglo Irish in 2008 and 2009 were right at the centre of the almost complete collapse of the Irish economy during the Global Financial Crisis.
6) Northern Rock Analysis
6.1) Introduction
Now that both cases have been discussed in more detail, and that the exact nature of the study has been described in the methods section, it is now possible to begin the analysis of the data that has been collected. The way in which this will be conducted will be in the following manner; the independent variables will be considered as having a greater or lesser impact on decision making in the case of Northern Rock, and then the same will be done with Anglo Irish. After this has been done, both cases will be examined comparatively; using the independent variables that have been operationalised in an earlier section. In addition to this, a concluding chapter will follow; which will bring together all the material collected and discussed in this study.
6.2) Media Pressure and Northern Rock
As was outlined when operationalising the independent variables, the modern media, and their coverage of a crisis situation, are a key consideration for those in positions of strategic leadership. This concern is evidenced throughout the data on Northern Rock; and there are clear indicators that the pressure exerted by the media had an impact on decision making by the leadership of HM Treasury during the crisis.
As was discussed in the previous chapter, the leak of information that the British authorities were to announce support for Northern Rock; while not changing the decision itself certainly resulted in a change in the way in which this support was announced as the Government had to act in a way that stopped the physical run on the bank. As was noted in the policy paper from the House of Commons; ‘although rumours about NRB had begun to circulate early in the summer (of 2007) the first official public indication of trouble came with a report from BBC news to the effect that NRB were in negotiations with the Bank’ (HoC Library, 2008, p. 3) thereafter followed by the run; in which ‘the announcement of the arrangement with the Bank had little obvious effect on public perceptions. The weekend papers were full of pictures of queues of depositor anxious to withdraw their savings from NRB branches around the country’ (HoC Library, 2008, p. 4). As was to be acknowledge in the House of Commons Treasury Committee report, this media coverage forced the Treasury to act sooner than it might have done. The committee stated that ‘several witnesses argued that the premature disclosure of the support operation in this way was instrumental in the run that followed. Mr
Applegarth (Chief Executive of Northern Rock) said that the leak “caused immense difficulties”’ (HoC Treasury Committee, 2008, p. 65). This was a view echoed by the chair of Northern Rock, who stated that;
‘Had the lead not happened and we had been able to announce on the Monday the facility with the Bank of England in a measured fashion, with full communication plans in place, undoubtedly there would have been some concern… to many of our customers but we think it would have been considerably less than it was in the way that it came about’ (HoC Treasury Committee, 2008, pp. 65-66).’
Of course, this last quote is in reference to the strategy of Northern Rock; but the same can be said of the Treasury given that the discussions on support for the bank were being conducted on their terms. As such, it can be seen that media pressure did not cause the Treasury, and its leadership, to decide to announce the assistance given to Northern Rock but it certainly affected the timing of the announcement. However, one point that is vital to note from the data is the fact that this variable does not appear in any of Alistair Darling’s four statements to the House of Commons during the crisis period. To an extent, it could be expected that the Chancellor would not openly acknowledge the fact that mass media coverage impacted upon decision making during a crisis; particularly one that was still ongoing. However, the total omission of the leak by the BBC that caused the physical run on Northern Rock is still noteworthy.
6.4) Time Pressure and Northern Rock
It would almost seem obvious to the outside observer that individuals in positions of leadership would, during a crisis situation, be under time pressure when having to make decisions critical to its resolution. Indeed, as has been stated in the review of existing literature on crisis decision making, this is one recognised in the theoretical background; see Boin et al (2005). This recognition of time pressure as it relates to decision making is also evidenced in the data relating to Northern Rock.
The speeches given by the Chancellor during the crisis period each give reference to the necessity of decisions being reached in a manner consistent with the importance given to time factors in the literature. For instance, in the first remarks given to the House of Commons on the subject of Northern Rock after the run, in a statement on October 11th 2007, Darling
stated that the situation of Northern Rock had been ‘monitored on a daily basis’ and that ‘as Northern Rock’s position deteriorated, it became clear that support was likely to be needed for it’ (Darling, 2007). Now this of course does not directly state that the deteriorating position of Northern Rock forced the Chancellor to announce the depoistor guarantee that stopped the physical run in the previous month, but it does demonstrate the fact that the Treasury were aware of the declining position of the bank. This awareness of time pressure is more clearly stated in Darling’s next statement to the House of Commons on November 19th, in which he states that ‘it is in the interests of everyone that the situation with regard to Northern Rock is resolved as soon as possible’ (Darling, 2007).
What must be recognised is that, to a greater or lesser extent, all decision making during crises is time dependent. However, the nature of Northern Rock made this a key component, in large part because of the nature of modern economics. The Chancellor, as stated in two of his statements to the House of Commons during the crisis, the fact that Northern Rock was still a Public Limited Company meant that decisions had to be reached, and announced, quickly in order to placate international financial markets. In both his statements on January 21 and February 18; Darling opens with a similar phrase that ‘the House will understand that it was necessary to issue a statement to the markets with our proposals before the start of trading this morning in the usual way’ (Darling 2008).
This awareness of time pressure, and evidence of its effect on the decision making of the Treasury during the crisis, is also borne out in the policy documents. This is perhaps best demonstrated in the policy paper produced by the House of Commons Treasury Committee; who reported that while the Treasury, Bank of England and FSA had intended to announce support for Northern Rock and yet;
‘On the afternoon of Thursday 13 September, according to the Governor of the Bank of England “rumours in the market started” in relation to the proposed operation. At 4.00pm on that day, the Tripartitie standing committee met at deputies level and decided to bring forward the announcement of the operation to 7.00am on Friday 14 September’ (HoC Treasury Committee, 2008, p. 64).’
So, in effect the Government’s hand had been forced, and the plans that had been made for the announcement of support for Northern Rock were changed by the fact that the mass
media had caught a hold of the story. Indeed, as has been stated numerous times already in this paper, the aforementioned leak was the cause of the physical run on the bank; which in turn affected the nature of the decisions open to the Treasury.
6.5) Constitutional Limitations and Northern Rock
In the United Kingdom, such is the constitutional settlement that a great deal of power exists within the office held by the Chancellor; and more generally by a governing party holding a majority in the House of Commons. As such, there are relatively few limitations on the power of the leadership of the Treasury to act; and even if they do have to gain Parliamentary approval for a particular measure it is usually a formality if the Government has a majority in the House of Commons. This was the case during the Northern Rock crisis, however there are examples within the data that demonstrate that the limitations on the power of the Treasury to act were a consideration for its leadership when deciding how to intervene, or indeed whether to intervene, in the Northern Rock crisis.
It is also important to note, as was stated by the Chancellor to the House of Commons on 11th October 2007, that in terms of when it is appropriate for the Government to intervene in the financial system;
‘there are clear principles governing such support, which are set out in the memorandum of understanding between the Treasury, the Bank (of England) and the FSA… Such such support should undertaken only when there is a genuine threat to the stability of the financial system and in order to avoid a serious disturbance in the wider economy’ (Darling, 2007).
As such, the British Government would not be seen to be in a position to act based upon whim alone, legislative arrangements dictated that only in the circumstances described above would such action be legitimate. Indeed, this concern by the leadership of the Treasury over what would be considered legitimate action, and the impact it made upon decision making is evidence in the final statement made by the Chancellor to the House of Commons during the crisis; when announcing that Northern Rock was to be taken into public ownership. Darling stated that; ‘the Government have decided to introduce legislation to take Northern Rock into a period of temporary public ownership … if the House agrees, the Bill will begin its parliamentary passage tomorrow’ (Darling, 2008). This Bill, allowing the Treasury to exercise powers to nationalise Northern Rock, had been under discussion within the Treasury
