The Northern Rock bank has said it favours an offer from the Virgin consortium as the preferred way out of its deep financial problems.

But if that and any other offers were to fail, then declaring the bank insolvent and bringing in administrators would be a strong alternative solution.

Somewhat like the Railtrack and Metronet insolvencies, putting a bank into administration creates some unusual and distinctly challenging problems.

A threat to people's hard earned savings is far more serious than just making it hard for them to get into work in the morning.

Bank failures are mercifully rare and the tendency is for the financial community to gather round and organize a rescue, so formal insolvency is even more unusual.

The last major case was BCCI back in 1992, where a sprawling international patchwork of banking operations went into liquidation.

It remains there even now, reflecting how long it can take to unravel a complex banking problem, especially if fraud is involved.

Security and trustworthiness

The task with a bank insolvency is deceptively simple at first

Assets must first be protected, then their value needs to be maximised.

Liabilities need to be identified and then minimised.

At the same time, staff issues need to be dealt with and the expectations of both depositors and borrowers must be managed.

The reality of course is very different.

Security issues are paramount, especially in these days of such acute sensitivity to the protection of the confidential data held by such institutions.


The greatest Day 1 priority is to secure all data and all vulnerable assets.

There are three enemies for the administrator in this area: outside hackers and thieves; systemic incompetence in a suddenly chaotic situation; and, most dangerous, disaffected insiders.

IT security experts need to be brought in at the very start to address these threats.

Hard and apparently disruptive to normality as it might be, a suitably revised version of the BCCI approach may be necessary.

Then it was thought safest to assess staff individually for their trustworthiness and commitment to helping the liquidators.

In these modern days, and if fraud is not a key issue, this can be modified.

But it would be essential to deny staff remote access to computer systems and databases until they were accepted back into the fold.


Dark corners

The administrators would need to hire in banking expertise to assist them and to oversee, from an independent standpoint, the activities of the bank's retained staff.

The first vital area for these outside experts would be to carry out a thorough review of the bank's loan book and other financial exposures.

In the case of a former building society, for example, this might seem relatively straight forward.

But with the modern fashion for complex financial engineering through swaps, credit default instruments, futures and options, who knows what they might find lurking in the dark corners of any bank's Treasury function.

Once the loan book and other risks have been assessed, action must be taken to protect their value.

There will be flaws in security documentation to be rectified where possible.

Human nature dictates suggests that borrowers or counterparties will try to take advantage of the situation to negotiate down their liabilities or refuse to pay anything at all.

A firm approach will be necessary.


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