TRƯỜNG ĐẠI HỌC KINH TẾ - ĐHQGHN
KHOA TÀI CHÍNH – NGÂN HÀNG
GROUP ASSIGNMENT
COMMERCIAL BANKING MANAGEMENT
SUBJECT :COMMERCIAL BANKING MANAGEMENT
TOPIC : NORTHERN ROCK COLLAPSE (2007) – THE
FIRST UK BANK TO FALL DURING THE
GLOBAL FINANCIAL CRISIS
LECTURER : DR HOANG TA THAI
—----------------------------------------------------------------------------------------------
Hà Nội - tháng 3 năm 2025
Work allocation table:
STT Members Tasks Deadline Work progress
1 Trần Phương Giang - 4. Parties involved 18/03/2025 Completed
23051576 - Presentation 27/03
- Report
2 Dương Bảo Hân - 3. Analyzing 18/03/2025 Completed
23051591 - Powerpoint
- Presentation 27/03
- Report
3 Bùi Huy Hoàng - 3. Analyzing 18/03/2025 Completed
23051613 - Powerpoint
- Presentation 27/03
4 Hoàng Hải Nam - 1. Introduction 18/03/2025 Completed
23051726 - 2. Causes
- Presentation 27/03
5 Nguyễn Văn Anh Minh - 5. Consequences 18/03/2025 Completed
23051706 - 6. Conclusion
- Presentation 27/03
6 Nguyễn Hữu Sơn - Powerpoint 25/03/2025 Completed
23051788 - Presentation 27/03
TABLE OF CONTENTS
GROUP ASSIGNMENT 1
I. Introduction: 4
II. Causes 5
III. Analyzing 6
1. The securitization situation of European banks 6
2. Northern Rock: 7
2.1. The main activities of Northern Rock 7
2.2. Compare to other banks 10
2.3. Northern Rock’s Risky Business Model and Financial
Vulnerabilities 11
2.4. Northern Rock’s Debt Structure and Stability During the Crisis 12
2.5. The Impact of ABCP Market Collapse on Northern Rock 13
2.6. Bank run 14
IV. Parties involved 14
V. Consequences 16
SOLUTION: 18
- Financial Sector Reforms 18
- Long-term Financial Impact 19
VI. Conclusion 19
VII. References 19
I. Introduction:
- Northern Rock is based in Newcastle and was founded in 1965 as a result of the
merger of two building societies named Northern Counties Permanent Building
Society and the Rock Building Society, both established in the 19th century.
- In 1997, Northern Rock converted from a mutual building society to a bank, which
expanded its legal powers to allow it to carry out a full range of banking activities.
Despite its ability to expand into a variety of financial sectors, Northern Rock
maintained its primary focus on the residential mortgage market.
- In the nine years from June 1998 (the first year after conversion) to June 2007 (before
the crisis), Northern Rock’s total assets increased from £17.4 billion to £113.5
billion (around US$200 billion). This represents an impressive annual growth rate of
23.2%, an extremely high figure in the banking industry. By 2007, Northern Rock had
become the fifth largest bank in the UK by mortgage assets.
- However, during the global financial crisis of 2007, Northern Rock was the first
UK bank to collapse, shaking the British banking financial system.
- In the summer of 2007, as global credit markets froze in the “credit crunch” Northern
Rock was unable to borrow new money to replace its short-term debt maturing,
causing serious liquidity problems. Although Northern Rock appeared to be in a
stronger position than other UK banks, it faced serious liquidity problems as
institutional lenders became wary of lending to mortgage banks following the US
subprime crisis.
II. Causes:
- Northern Rock mainly depended on raising funds from short-term financial
markets to finance long-term mortgage loans (1). The bank used securitization to
convert loans into securities and sell them to investors. This model made the bank
dependent on selling securitized assets to maintain liquidity.
⇨ When financial markets faced a crisis and interest rates rose, raising funds from
these sources became difficult and the bank could not maintain normal operations.
- The global financial crisis of 2007-2008 caused credit markets to freeze (2). This
meant that banks could not borrow from external financial sources, leading to severe
liquidity shortages. Northern Rock could not raise funds from the interbank
market and was forced to seek support from the Bank of England.
- Depositors started to withdraw their money at 72 branches . This is known as a
bank run (3). The bank suffered severe liquidity problems due to being unable to
meet customer withdrawal demands, triggering a severe liquidity crisis and had to
need assistance from the Bank of England (BoE).
⇨ This was one of the first instances in the UK where a large number of customers
withdrew money from a bank simultaneously.
- Northern Rock was heavily reliant on the securitization market to raise funds (4),
selling mortgage loans to investors. When the securitization market collapsed and
demand for securities sharply decreased, the bank could not refinance through this
method, leading to a liquidity shortfall and an inability to maintain operations.
- Despite warning signs of financial risk in its business model, Northern Rock did not
take sufficient precautions. The bank lacked effective strategies and appropriate
risk management systems (5) to handle the risks associated with its business model
and lending activities.
III. Analyzing
1. The securitization situation of European banks
- Figure 1 shows the sharp rise in European securitisations
- Figure 2 indicates the volume of global CDO issues and particularly the sharp
increase in 2006 and the first half of 2007, followed by an almost total collapse in the
summer months of that year.
- Securitisation involves a bank bringing together a large number of its loans (e.g.
mortgages) into a single package and selling the portfolio into the capital market.
➔ These statistical charts demonstrate the significant growth of the securitization and
CDO markets, which created a favorable environment for Northern Rock to pursue a
high-risk business model. However, the increased reliance on short-term
borrowing and heightened systemic risk made Northern Rock vulnerable when the
global financial crisis erupted.
2. Northern Rock:
2.1. The main activities of Northern Rock
a. Residential Mortgage
- Characteristics:
+ This is Northern Rock’s core business, focusing on providing loans to customers to
buy houses.
+ Northern Rock is famous for its high loan-to-value ratio mortgages.
+ They use a strategy of securitization to turn mortgage loans into financial securities to
sell on the market, thereby increasing their lending capital.
- Revenue and share:
+ Before the crisis (2006-2007), the mortgage business contributed the majority of
Northern Rock's revenue. According to the 2006 annual report, their mortgage
portfolio accounted for around 90% of total lending assets.
+ Total mortgage lending assets reached around £100 billion in 2007, and interest
income from this business was the main source of revenue, estimated to account for
around 80-85% of total operating revenue.
- Advantages:
+ Rapid growth: Thanks to an aggressive lending strategy, Northern Rock has expanded
its market share in the UK mortgage market, from a local bank to one of the largest
mortgage banks.
+ High profitability: Interest income from mortgage loans provides stable cash flows
and good profit margins.
+ Meeting market demand: During the UK property market boom (2000-2007),
Northern Rock responded well to the home loan needs of individual customers.
- Disadvantages:
+ High risk: Loans with high loan-to-value ratios lead to a high risk of default if house
prices fall or customers default.
+ Reliance on securitization: When the financial markets froze (2007), securitization
struggled, causing banks to fall into a liquidity crisis.
+ Fierce competition: The UK mortgage market has many big competitors such as
Lloyds, HSBC, forcing Northern Rock to introduce riskier products to attract
customers.
b. Securitization
- Model:
Northern Rock operates a business model focused on securitizing mortgage loans to
raise capital. This process includes:
+ Northern Rock (Originator): Issues mortgage loans, then transfers the portfolio to
Granite Finance Trustees Ltd.
+ Granite Finance Trustees Ltd (Mortgage Trustee): Holds the mortgage portfolio to
protect investors, then transfers it to Funding 2 Ltd.
+ Funding 2 Ltd (Special Purpose Entity): An SPV purchases the portfolio from Granite
Finance Trustees Ltd, segregating the assets from Northern Rock's balance sheet.
+ Granite Master Issuer PLC (Note Issuer): Issues debt securities (Class A, B, M, C, D
Notes) to raise capital, transferring the proceeds to Funding 2 Ltd to finance the
purchase of the mortgage portfolio.
+ Securities are divided by risk level:
Class A Notes: Low risk, low yield.
Class B, M, C Notes: Medium risk, higher yield.
Class D Notes: Highest risk, first to lose if defaulted.
Cash flow from mortgage borrowers pays interest and principal to investors, while
Northern Rock uses money from investors to continue lending. This is an important
strategy to increase capital for lending activities, especially when they do not have
enough savings deposits.
- Revenue and weight:
+ Played a key role in financing around 50% of the mortgage portfolio in 2007.
+ The indirect effect was to increase lending capacity, which in turn increased mortgage
interest income.
- Advantages:
+ Increased capital: Securitisation enabled Northern Rock to raise large amounts of
capital without relying entirely on deposits.
+ Risk transfer: Some of the credit risk was transferred to investors who bought the
securities.
+ Financial efficiency: In favourable market conditions, this was an efficient way to
expand.
- Disadvantages:
+ Market risk: When financial markets froze (2007), Northern Rock was unable to sell
its securitizations, leading to a liquidity crisis.
+ Financial complexity: Securitisation requires complex management and is vulnerable
to global volatility.
+ Investor dependence: If investors lose confidence, this strategy collapses quickly.
⇨ Northern Rock’s business showed rapid but unsustainable growth due to its heavy
reliance on securitization. This model allowed the bank to expand its lending but
also left it vulnerable to financial turmoil. When markets froze in 2007, Northern
Rock ran into a liquidity crisis, highlighting the instability of its funding strategy.
⇨ Although many analyses of Northern Rock’s collapse point to its heavy use of
securitized bonds as the primary cause, the reality is more complex. Northern Rock’s
securitized bonds were medium- and long-term, with an average maturity of over a
year. The real problem was not securitization but over-reliance on short-term
wholesale funding to finance the bank’s operations. When credit markets froze in
August 2007, Northern Rock was unable to refinance these short-term debts.
2.2. Compare to other banks
- Retail Deposits and Wholesale Funding:
+ Other banks such as LloydsTSB (61%) and Royal Bank of Scotland (62%) rely
heavily on retail deposits, others have a higher proportion of wholesale funding.
+ Notably Northern Rock with just 30% retail deposits and 62% short-term funding
from the wholesale market.
- Funding ratio:
+ Compared to Barclays Bank (58% retail deposits, 42% market funding) or HBOS
(50% - 50%), Northern Rock has a significantly higher level of dependence on
financial markets.
+ Northern Rock has the lowest retail funding ratio in the list (30%), while also having
the highest short-term funding ratio (62%). This reflects a business model that relies
heavily on securitization of debt rather than traditional deposits.
- Risks from Northern Rock's funding model:
+ When the financial crisis occurred in 2007-2008, the inability to raise capital from the
market led to a serious liquidity crisis and caused Northern Rock to collapse.
+ However, Northern Rock's funding ratio is 0.48, significantly lower than other banks.
Such a low ratio shows that the bank has few stable long-term sources of funding
from customer deposits and has to rely heavily on financial markets to maintain
operations. In a stable financial market environment, this model can help the bank
expand rapidly.
⇨ Banks with higher funding ratios, such as LloydsTSB (1.56) and Royal Bank of
Scotland (1.63), are more secure because they have stable funding from customer
deposits. These banks are less dependent on the financial markets and are
therefore less affected by financial market crises. Meanwhile, Northern Rock has
the lowest ratio (0.48), reflecting an imbalance in its funding model and one of the
main reasons for its collapse.
⇨ Overall, the table shows that Northern Rock has a risky funding model, with an over-
reliance on short-term funding from the financial markets, while other banks have a
better balance between retail deposits and market funding.
2.3. Northern Rock’s Risky Business Model and Financial Vulnerabilities
- Northern Rock's total liabilities rose sharply from around £20 billion in 1998 to
almost £120 billion in 2007.
⇨ This reflects the bank's rapid expansion in the period before the financial crisis, which
saw a significant increase in the size of its operations and the level of debt.
- The debt-to-asset ratio reflects the extent to which a bank uses financial leverage to
finance its assets. From the chart, it can be seen that) Northern Rock's total assets in
June 2007 were around £110-120 billion, while equity only made up a very small
portion, around 2-3% of total assets.
⇨ This means that the bank's liabilities accounted for around 97-98% of total assets,
an extremely high ratio compared to traditional banks. Northern Rock’s heavy
reliance on debt rather than equity makes it vulnerable to financial turmoil,
particularly when short-term funding markets are tight.
- One of the major risk signs for Northern Rock is that lending growth has outpaced
deposit growth. Between 1998 and 2007, retail deposits grew only marginally from
around £10 billion to £20 billion, indicating that the bank was not expanding its
sources of funding from retail customers. Meanwhile, securitized notes soared from
almost zero to over £50 billion, becoming the main source of funding for lending.
⇨ This reflects Northern Rock’s heavy reliance on short-term funding markets
rather than the stable sources of funding from deposits, leaving the bank
vulnerable to a crisis if the securitization market fails.
⇨ According to figures, up to 75% of the bank’s total funding comes from short-
term financial instruments such as interbank loans and securitization, while the
figure for traditional banks is only around 30%. This means that instead of relying on
customer deposits, which are typically more stable, Northern Rock relies on short-
term funding markets to sustain its operations. A business model focused on rapid
growth without a sustainable capital base poses significant risks, leading to serious
consequences when market conditions change in an unfavorable direction
2.4. Northern Rock’s Debt Structure and Stability During the Crisis
- The bank remained legally solvent (the nominal value of assets exceeding liabilities),
only months earlier the bank had reported record profits, the quality of its assets was
never in question, its loan-loss record was good by industry standards, and for many
years the bank was regarded as a star-performer in the financial markets.
- Prior to the crisis, Northern Rock's debt structure had changed significantly. As of
June 2007, Northern Rock's debt structure comprised: £45.7 billion in securitized
bonds, £8.1 billion in covered bonds, £24.4 billion in retail deposits, and £26.7 billion
in other wholesale funding
- After the crisis, by December 2007, this structure had changed significantly: £43
billion in securitized bonds, £8.9 billion in secured bonds, £10.5 billion in retail
deposits, £11.5 billion in other wholesale capital, and £28.5 billion in loans from the
Bank of England.
=> It is noteworthy that securitized bonds and secured bonds - which are long-term debts
- remained relatively stable throughout the crisis. The largest decline was in retail
deposits and short-term wholesale capital.
2.5. The Impact of ABCP Market Collapse on Northern Rock (Khủng hoảng thương
phiếu)
This chart shows Asset-backed Commercial Paper Outstanding from July 19, 2006, to
July 16, 2008, according to data from the Federal Reserve.
- Chart Analysis
+ Pre-crisis Trend (07/2006 - 08/2007):
❖ ABCP continued to increase, peaking at around USD 1,200 billion on
08/08/2007.
❖ This is a sign that the credit market was still stable before this time.
+ ABCP Market Collapse (08/2007 - 07/2008):
❖ On 08/08/2007, the market peaked.
❖ By 15/08/2007, ABCP fell sharply, signaling a decline in confidence in
the financial system.
❖ ABCP then continued to decline, indicating that the asset securitization
market was collapsing.
- Link to the collapse of Northern Rock
+ Northern Rock, a British bank heavily reliant on short-term funding through the
ABCP market, fell into crisis in September 2007.
+ When ABCP collapsed in August 2007, Northern Rock lost a key source of funding,
leading to a liquidity crisis.
● By September 2007, Northern Rock had to ask for support from the Bank of
England, leading to the first banking crisis in the UK in over 100 years.
2.6. Bank run
- In the summer of 2007, during the global credit crunch, Northern Rock faced liquidity
problems as it couldn't replace its maturing short-term debt. Despite appearing
stronger than other UK banks, it struggled as institutional lenders became hesitant
after the US subprime crisis. On September 12, 2007, the bank asked the Bank of
England for emergency liquidity support.
- When the news broke on September 14, customers rushed to withdraw their savings,
causing a "bank run" as they feared the bank was over-leveraged and low on cash. An
estimated £1 billion was withdrawn that day, and by September 17, £2 billion had
been withdrawn since the emergency funding request.
Nationalization
- Instead of selling its assets at a discount, NR chose to borrow from the Bank of
England (BOE). However, the interest rate on the loan from the BOE (at least
6.36%) was higher than the average return on NR’s assets (around 6%), rendering
the bank insolvent from a business perspective. => This shows that even if a bank has
significant assets but its financial structure is not suitable for a changing interest rate
environment, it can still fall into crisis.
- As mentioned aboveNorthern Rock lacked sufficient equity, necessitating
NATIONALIZE to protect deposits and stabilize the banking system which was
considered as the final measure.
- The bank was hit hard by the US credit crisis and had to borrow around £25 billion
($51 billion) in emergency funding from the Bank of England to get out of debt. The
UK Treasury failed to ask major financial groups to save Northern Rock. No one was
willing to take the risk as the turmoil in the world's credit markets spread. The
government has decided to put Northern Rock on a long-term nationalisation
programme on 22/2/2008.
⇨ The root cause of Northern Rock's collapse lies in its business strategy of relying on
low interest rates for a long time. When the financial environment changed and NR
was forced to face a liquidity shortage, the bank could not adapt in time. Having to
borrow at higher interest rates than its profits made NR unable to sustain its
operations for a long time. Although there was a possibility that the liquidity
shortage would end if general interest rates fell, NR's risk of insolvency was still very
high, eroding market confidence. Ultimately, the combination of liquidity pressure,
high financing costs and an inflexible business strategy pushed Northern Rock to the
brink of collapse.
IV. Parties involved
1. Bank of England
- After abandoning the attempt to find a buyer, a Bank of England rescue became
inevitable; on 13th September 2007, news broke that Northern Rock had sought
emergency funding from the Bank of England as a “lender of last resort.”
- On 14th September 207, the Chancellor of the Exchequer authorised the Bank of
England to provide a liquidity support facility to Northern Rock against appropriate
collateral and at an interest rate premium.
⇨ That liquidity facility was available to help Northern Rock fund its operations during
the period of turbulence in financial markets while Northern Rock worked to secure
an elderly resolution to its current liquidity problems.
⇨ That was the first time in years that the Bank has had to perform its traditional
role as lender of last resort. It meant depositors' money in the bank was safe,
especially as Northern Rock had more than £100 billion of assets.
2. UK government
th
- On 17 September 2007, the chancellor of the exchequer, Alistair Darling, followed
the discussion with the governor of BOE and the Chairman of the FSA, promising
that the government would guarantee all savings deposits at Northern Rock amid
concern that Britain was plunging into its worst banking crisis in decades.
- It also promised to refund any penalties that savers may have paid when they
withdrew their funds from the bank - so long as they put the money back in by
October 5. "Any customer who paid a penalty to withdraw their funds from Northern
Rock, due to concern over the current situation, will have the penalty refunded if they
reinvest those funds in the same type of account with Northern Rock by 5 October
2007," it said.
⇨ They wanted to help mitigate the bank run. The announcement of the emergency
funding caused widespread panic, which led to a bank run in which many customers
rushed to withdraw their savings. By offering to refund penalties, Northern Rock
aimed to encourage customers to return their funds and stabilize the bank’s liquidity.
3. Depositors and the public Northern Rock Panic
- Depositors withdraw their savings during the bank run, fearing insolvency. As
thousands of customers queued up outside branches in a bid to get their money,
many more were trying to log on to Northern Rock’s website; some as early as 5
am in a desperate bid to retrieve their savings.
- Although the chief executive of Northern Rock as Adam Applegarth reassured that
they had received emergency funding from the Bank of England, some customers
were still concerned at the bank’s future and were withdrawing funds online and
at branches, particularly in the north, where the majority of Northern Rock’s
customers based
⇨ Led to the liquidity crisis of the bank because of the massive demands of withdrawal
from the customers
4. Shareholders
- Shareholders and investors of Northern Rock faced significant losses as the value of
the bank’s shares plummeted during the crisis. Before the rescue of the Bank of
England, there were 180,000 shareholders in Northern Rock. It was reported that
they have lost more than 90 million pounds after the shares fell from a peak in
February.
5. FSA (Financial Services Authority)
- The Financial Services Authority was criticised for “systematic failure of duty” by
the Treasury select committee. It laid blame on the regulator’s door for failing to
supervise Northern Rock properly. It said: “It did not allocate sufficient resources or
time to monitoring a bank whose business model was so clearly an outlier; its
procedures were inadequate to supervise a bank whose business grew so rapidly.”
- It concluded that the regulator failed in its responsibility to ensure that the work of the
board of Northern Rock was sufficient to the task.
V. Consequences
- Bank Run and Liquidity Crisis: The bank's reliance on short-term wholesale
funding led to severe liquidity problems when credit markets froze in August 2007.
This triggered a bank run, with customers withdrawing significant amounts of money,
exacerbating the crisis
- Economic Impact Assessment
+ Impact on UK GDP (1): The Northern Rock crisis contributed to a decline in
economic confidence, leading to the UK's 2008 recession (GDP fell by 0.1% in
Q4/2007).
1. Loss of public trust in banks: Banks had to reduce interest rates to increase deposits
and restore public confidence.
2. Bailout costs (Chi phí cứu trợ): The total cost of nationalization and liquidity support
was estimated at around £27 billion, increasing the public debt-to-GDP ratio.
- The Northern Rock crisis contributed to a decline in economic confidence, leading to
the UK's 2008 recession (GDP fell by 0.1% in Q4/2007).
- The 2008-2009 financial crisis left serious consequences:
● Before the crisis (2000-2007)
+ UK GDP grew by an average of 2.8 - 3.5%/year.
+ Eurozone and US GDP also fluctuated between 2-4%.
● During the crisis (2008-2009)
+ UK GDP fell sharply to ~ -5.5% in 2009.
+ Eurozone fell by ~ -4.5%, US fell by about -2.5%
+ This was the worst GDP decline since the Great Depression of the 1930s.
● Post-crisis (2010-2019)
+ UK GDP recovered slowly, averaging 1.5 - 2%/year, lower than the pre-
2007 level.
+ This shows that economic growth was damaged in the long term by the
financial crisis.
- Northern Rock was the “first shot” of the 2008 financial crisis, leading to a long-
lasting chain of consequences.
1. Increasing public debt:
+ Before the crisis (before 2007): Public debt/GDP below 40%.
+ After the financial crisis (2010): Public debt increased to over 70% of GDP due to
government intervention in the financial system.
2. Public spending surges due to bailouts:
+ The UK government nationalised Northern Rock in 2008 to prevent the spread of
financial risk, the total cost of nationalization and liquidity support was estimated at
around £27 billion
+ Billions of pounds were spent bailing out the banking system (including RBS,
Lloyds).
+ The fiscal stimulus package to support the economy also increased the budget
deficit.
3. Economic Recession and Impact on GDP Growth:
+ GDP declined sharply after 2008, leading to a decline in tax revenue.
+ Growth slowed in the following decade, affected by the aftermath of the crisis.
4. Restricting public spending due to debt pressure:
+ When public debt increases, the government has to cut public spending to
balance the budget.
+ Sectors such as health, education, and infrastructure are affected due to limited
budgets.
+ Public investment decreases, affecting long-term growth and economic
productivity.
5. Austerity and social impact:
+ The UK government made major budget cuts after 2010 to reduce the deficit.
+ The welfare system was reduced, affecting low-income people.
+ Controversial because it slowed economic recovery and increased inequality.
6. Prolonged financial instability, vulnerable to new shocks:
+ High public debt makes the economy vulnerable to other crises such as Brexit,
COVID-19.
+ Events such as the 2020 pandemic cause public debt to increase further, as the
government has to continue spending to support the economy.
+ Creating long-term risks to the UK's financial stability and debt servicing capacity.
+ Stock Market Impact (2): The FTSE 100 index fell by approximately 5% in
September 2007 as news of Northern Rock spread.
1. Decline in Market Confidence:
+ The collapse of Northern Rock shook investor confidence in the UK banking
system. When a major bank faced a liquidity crisis, investors feared that other
financial institutions might also face similar risks. This led to a sell-off in the stock
market, causing the FTSE 100 index to drop sharply.
2. Systemic Risk Contagion:
3. The Northern Rock case was one of the first signs of the 2007-2008 global financial
crisis. Northern Rock's difficulties highlighted serious weaknesses in the financial
system, particularly the over-reliance on short-term capital markets. Investors and
financial institutions began to reassess risk levels throughout the system, leading to a
decline in the stock market.
4. Increased Cost of Capital:
+ After the Northern Rock event, banks became more cautious in lending, increasing
the cost of capital in the financial market. This affected both businesses and
individuals, reducing investment and spending, thereby negatively impacting
economic growth.
5. Impact on Monetary and Fiscal Policy:
+ The Bank of England (BOE) was forced to intervene by providing liquidity to
Northern Rock and other banks to stabilize the financial system. Subsequently, the
UK government had to implement costly bailout measures, including the
nationalization of Northern Rock in 2008. These measures increased the fiscal
burden and sparked controversy over financial crisis management.
SOLUTION:
- Government Intervention: The UK government intervened by guaranteeing deposits
and providing emergency funding through the Bank of England. This helped stabilize
the situation but highlighted the need for stronger financial regulation
- Nationalization: Northern Rock was nationalized in February 2008, marking a
significant government intervention in the banking sector. This move was aimed at
preventing further instability in the financial system
- Financial Sector Reforms (1)
+ Regulatory Changes: The crisis led to a review of financial regulation in the UK. The
Financial Services Authority (FSA) acknowledged its supervision failures and
announced reforms to improve oversight and risk management in banks.
+ Business Model Reevaluation: The collapse highlighted the risks of relying heavily on
wholesale funding and the importance of diversifying funding sources. This led to a
reevaluation of business models across the banking sector
+ Deposit Protection: The crisis underscored the need for robust deposit protection
schemes. Although the UK's scheme at the time covered only a limited amount, it was
later enhanced to provide greater protection for depositors.
- Government policy:
- Long-term Financial Impact (2)
+ Asset Split and Sale: Northern Rock's assets were split into "good" and "bad" sets.
The "good" assets were sold to Virgin Money, while the "bad" assets remained under
government management
+ Potential Profits from Intervention: The UK government's intervention in Northern
Rock could eventually yield significant profits, with estimates suggesting up to £8
billion. However, there have been calls for some of these profits to be returned to the
North East region or to compensate shareholders who lost out during nationalization
VI. Conclusion
The collapse of Northern Rock became an iconic event in the 2008 global financial
crisis. Analysis of the case has revealed several important lessons:
- Northern Rock’s business model was overly reliant on short-term funding from
financial markets, leaving the bank vulnerable to liquidity shocks.
- Lack of diversification in the investment portfolio and poor risk management
increased the bank’s risk exposure.
- Government intervention, including the nationalisation of Northern Rock, sparked
debate about the appropriate role of government in the financial system.
- This led to increased regulatory oversight and a focus on improving the resilience of
the financial system.
- Ultimately, the collapse of Northern Rock highlighted weaknesses in the financial
regulatory system and highlighted the importance of effective risk management in
financial institutions. This event led to significant changes in the way the banking
industry is operated and supervised, with the aim of preventing similar crises in the
future. eg: basel III at 2010
VII. References
agencies, M. O. a., 2007. Customers rush to withdraw money. [Online]
Available at: https://www.theguardian.com/business/2007/sep/14/money2
Anon., 2008. TSC report attacks FSA for failing to supervise Northern Rock. [Online]
Available at: https://www.moneymarketing.co.uk/news/tsc-report-attacks-fsa-for-failing-to-
supervise-northern-rock/
Anon., 2023. tutor2u. [Online]
Available at: https://www.tutor2u.net/economics/reference/global-financial-crisis-a-short-
history-of-northern-rock
AQA, E. O. I. E. W., 2023. Global Financial Crisis - A Short History of Northern Rock.
[Online]
Available at: https://www.tutor2u.net/economics/reference/global-financial-crisis-a-short-
history-of-northern-rock
Collinson, P., 2007. Government guarantees Northern Rock deposits. [Online]
Available at: https://www.theguardian.com/business/2007/sep/17/money1
England, B. o., 2007. Liquidity Support Facility for Northern Rock plc, s.l.: s.n.
Inman, P., 2007. Shareholders accuse Northern Rock. [Online]
Available at: https://www.theguardian.com/business/2007/sep/25/money
Shin, H. S., 2009. Reflections on Northern Rock: The Bank Run that Heralded The Global
Financial Crisis, s.l.: Journal of Economic Perspectives.
Wikipedia, n.d. Nationalisation of Northern Rock. [Online]
Available at: https://en.wikipedia.org/wiki/Nationalisation_of_Northern_Rock
