Depositors' Risk Perceptions and Bank Failure in a System With Co-operative Loan Support By Anthony Saunders Contents: I. Introduction. -- II. The U.K. Banking Crisis. -- III. The Model. -- IV. The Empirical Results. -- V. Conclusions. I. Introduction T here is a growing literature on the causes and effects of bank failure in the U.S. [see for example Sinkey, I978; Altman, Sametz, I977]. However, little attention has been focused on bank failures or crises in other countries. This is unfortunate, since there are considerable inter- country differences between banking systems and how bank failures are handled. For example, banking in the U.K., Canada and Australia is a far more centralized and concentrated industry than in the U.S., with a few domestic multi-branch banks dominating tile retail sector 1. The concentrated nature of these banking systems has often resulted in very close links (including co-operation in joint rescues) between the regulators and the regulated. The objective of this paper is to analyze the effects, on depositors' confidence, of a banking crisis that developed in the U.K. over the period i973--i974. This crisis is now agreed to have been the worst suffered in the U.K. since the great depression [Bank of England, I978, para 26]. Nearly thirty small banks found themselves in severe financial difficulties and eventually eight ended in the hands of the receiver or in liquidation [ibid., Appendix I]. The Bank of England's response to this crisis was to organize a support operation, the so-called lifeboat fund, with the aid of funds from the large (multi-branch) domestic Clearing banks. The role of this co-operative fund was to identify problem banks, and where feasible, to give support by re-cycling deposits or making short-term loans. The risks of this operation were shared on an agreed formula, based on Clearing bank size. The lifeboat operation began in January I974. In the first year of the operation alone, more than ~i,2oo million were extended in loans to problem banks [ibid.]. Remark : The author would like to thank an anonymous referee for his helpful comments. See Saunders and Ward [x976] for a discussion of the structure of the U.K. banking system,