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Northern Rock lessons

How did a few dodgy loans in the US housing market lead to a mini-crisis in Britain's banking system?

By Michael Prest   October 2007

A century of advancing regulation, bank consolidation and financial sophistication was thought to have put Dickensian bank “runs” behind us. Those queues outside Northern Rock branches said otherwise. And they spoke to a deeper fear: that what began as a complex financial crisis in America could degenerate into a slowdown or even recession here.

So what is the connection? How did some dodgy loans in the US mortgage market undermine the eighth largest British bank and apparently threaten several others? The link here is a financial mechanism which most of us never have to think about—the inter-bank market. At any…

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