Northern Rock Term Paper
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The Case of Northern Rock
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Table of Contents 1 Scope of Study 3 2 Introduction to the Northern Rock Debacle 3 2.1 Introduction to Northern Rock’s Business Model 4 3 Internal Analysis 7 3.1 Analysis of Northern Rock’s Balance Sheet 2006 7 3.1.1 Northern Rock’s Sources of Funding 7 3.1.2 Asset and Liability Maturity Mismatch 2006 8 3.1.3 Peer Group Ratio Comparison to Assess Northern Rock Liquidity Risk 2006 9 3.2 Exposure to Low Probability High Impact (LPHI) Risk 10 4 Analysis of Market Condition 10 4.1 U.S Sub-prime Mortgage Market Crisis 10 4.2 Consequences of U.S. Sub-prime Mortgage Market Crisis 11 4.3 Impact on Northern Rock 12 5 The Collapse of Northern Rock 13 5.1 Bank Run 13 5.2 Nationalization of Northern Rock 14 5.3 Insufficient Due Diligence 14 5.4 Inaccurate Business Forecasts 15 6 Ineffective Depository Insurance Scheme 15 7 Regulators’ Role in Northern Rock’s Failure 15 7.1 Financial Services Authority (FSA) 16 7.2 Bank of England (BoE) 16 7.3 Basel II Liquidity Framework 17 8 Aftermath of the Crisis 17 8.1 Restructuring of Northern Rock into Two Entities 17 8.2 Introduction of Basel III 18 9 Lessons Learnt 18 9.1 For Regulators 19 9.1.1 Instilling Market Discipline 19 9.1.2 Closer scrutiny for systemically important banks 19 9.1.3 Vigilance in pre-empting potential market developments and risks 19 9.2 Bank Managers 20 9.2.1 Awareness of business model and risks undertaken 20 9.2.2 Effective Crisis Management Plans In Place 20 9.2.3 Incentive Schemes to Discourage Excessive Risk Taking 20 10 Conclusion 21 11 Bibliography 22
1 Scope of Study
On the 14th of September 2007, Northern Rock became the first United Kingdom bank to experience a bank run in 150 years(British Broadcasting Corporation, 2007). This study seeks to investigate the reasons behind the bank run and the
The Case of Northern Rock
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Table of Contents 1 Scope of Study 3 2 Introduction to the Northern Rock Debacle 3 2.1 Introduction to Northern Rock’s Business Model 4 3 Internal Analysis 7 3.1 Analysis of Northern Rock’s Balance Sheet 2006 7 3.1.1 Northern Rock’s Sources of Funding 7 3.1.2 Asset and Liability Maturity Mismatch 2006 8 3.1.3 Peer Group Ratio Comparison to Assess Northern Rock Liquidity Risk 2006 9 3.2 Exposure to Low Probability High Impact (LPHI) Risk 10 4 Analysis of Market Condition 10 4.1 U.S Sub-prime Mortgage Market Crisis 10 4.2 Consequences of U.S. Sub-prime Mortgage Market Crisis 11 4.3 Impact on Northern Rock 12 5 The Collapse of Northern Rock 13 5.1 Bank Run 13 5.2 Nationalization of Northern Rock 14 5.3 Insufficient Due Diligence 14 5.4 Inaccurate Business Forecasts 15 6 Ineffective Depository Insurance Scheme 15 7 Regulators’ Role in Northern Rock’s Failure 15 7.1 Financial Services Authority (FSA) 16 7.2 Bank of England (BoE) 16 7.3 Basel II Liquidity Framework 17 8 Aftermath of the Crisis 17 8.1 Restructuring of Northern Rock into Two Entities 17 8.2 Introduction of Basel III 18 9 Lessons Learnt 18 9.1 For Regulators 19 9.1.1 Instilling Market Discipline 19 9.1.2 Closer scrutiny for systemically important banks 19 9.1.3 Vigilance in pre-empting potential market developments and risks 19 9.2 Bank Managers 20 9.2.1 Awareness of business model and risks undertaken 20 9.2.2 Effective Crisis Management Plans In Place 20 9.2.3 Incentive Schemes to Discourage Excessive Risk Taking 20 10 Conclusion 21 11 Bibliography 22
1 Scope of Study
On the 14th of September 2007, Northern Rock became the first United Kingdom bank to experience a bank run in 150 years(British Broadcasting Corporation, 2007). This study seeks to investigate the reasons behind the bank run and the
Bibliography: BBC News. (2008 29-December). http://news.bbc.co.uk/2/hi/uk_news/england/london/7802807.stm. From BBC News. Daily Mail City Team. (2008 31-January ). http://www.thisismoney.co.uk/30-second-guides/article.html?in_article_id=429885&in_page_id=53611. From thisismoney. FSA Press Release. (2010 13-April). http://www.fsa.gov.uk/pages/Library/Communication/PR/2010/066.shtml. From FSA Website. Montia, G. (2009 4-August). http://www.financemarkets.co.uk/2009/08/04/northern-rock-together-mortgages-push-up-arears/. From Finance Markets. Moody 's Analytics. (2010 May). Liquidity Risk - Basel Committee on Banking Supervision. PRIMA. Northern Rock. (2011). Corporate Profile. Retrieved 2011 2-April from Northern Rock: Investor Relations: http://companyinfo.northernrock.co.uk/investorRelations/corporateProfile/ Northern Rock plc Newsroom Ringshaw, J. W. (2007 16-September). http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article2459583.ece. From The Sunday Times. Seib, C. (2008 27-March ). http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article3628701.ece. From The Sunday Times.