Decades ago I used to teach commerce and history. Part of the course (both subjects) was a history of banking. I vividly remember seeing a picture of a stage coach loaded with gold being rushed by the Bank of England to save a County Bank in difficulties. In those days (mainly the end of the C18th and early C19th) banks issued their own currency which they backed with gold. Any holder of their banknotes could insist on exchanging these for the face value in gold. If these banks started to lend out too much to the wrong customers rumours would go round that the customers wouldn't be able to cash in their notes and they would end up left with a lot of worthless paper. The Bank of England would be the Lender of Last Resort, propping up these rocky institutions with the gold held in its vaults. In the 1970s when I was teaching this course the textbooks told me that 'runs on the banks' would never happen in modern society in the UK because all banks were so large (through mergers many old banks had disappeared by then - the Nationa & Provincial, the Midland, etc) that they were invulnerable. Since then lots of new banks have appeared (mainly former building societies) and today we are witnessing the old style 'runs' with queues building up outside branches of Northern Rock - customers demanding their deposits back. All just like the scenes in C18th England - and the film 'It's a Wonderful Life'. Trouble is the public aren't rational and despite the assurances of the Bank of England too many people are worried about the lending policies of most major (and all minor) banks in the UK. Alastair Darling (Chancellor of the Exchequer) was right to call for a return to 'old fashioned banking'.
BCCI went under leaving many people ruined. Is Northern Rock going to be allowed to go under. Probably not - but it might not be the best time to buy shares in that Bank - or perhaps it might be a long term investment - 30 years?
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