Why Did Northern Rock Failure

Northern Bank

History:
Northern rock was formed in 1965 by the merger of two financial institutions, Northern Counties Permanent Building Society and the Rock Building Society. In the beginning, Northern Rock acquired 53 smaller financial institutions. Initially Northern rock was a building society it means it was a mutual organization but then along with many other building societies in 1990s, Northern Rock move towards stock exchange side as a bank. All through this period a worry against demutualization was that the benefits of a shared society were developed by its individuals all through its history, not simply by current individuals, and that demutualization was a treachery of the group that the social orders were made to serve. Northern
Key players which were involved in the failure of northern rock were executive and non-executive directors, audit nominations, remunerations and risk committees, government, Bank of England, Financial Services Authority (FSA), media, external and internal auditors, financial analysts and credit rating agencies.
• Role of FSA
FSA did not use its powers to stop Northern Rock from risky landings and business model of Northern rock was ignored by FSA. Northern Rock conducted stress testing and FSA failed to give it attention. FSA admitted that their supervision to Northern Rock was not carried out to an acceptable standard. FSA was highly criticized by everyone on the failure of Northern Rock that it’s the failure of
Northern Rock asked for the emergency funding from the Bank of England on 14th September 2007to continue operating but the bank did not inject any money during the period of liquidity crisis. Bank of England did not show any interest in Northern Rock and later they provided money but with higher interest rates.

• Directors
Executive and non-executive directors were also responsible for the failure of Northern Rock. The mismanagement by the directors led Northern Rock towards failure. They were failed to manage the internal risk and they did not focus on liquidity and off-balance sheet activities.

• Securitization
Securitization is the conversion of illiquid asset into securities. Due to the huge gap between amount lent and the deposits, Northern Rock’s securitized notes were of the long term maturity so the mismatch between long term assets and short term liabilities caused trouble for the Northern Rock. In 2007, the credit issuer was not able to cover the risk and ultimately Northern Rock could not sell other securitized products due to lack of confidence.

Effects of Northern Rock Failure:

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