Question

Was inadequate regulation the reason for the demise of Northern Rock? Support your answer

with evidence.

Answer 1

Since the 1930s, the world is going through one of the biggest economic crises. This is a serious matter that requires action. The confusion about the cause of the economic crisis is expressed in the different names given to it: subprime crisis, credit crunch crisis, banking crisis, financial crisis, global economic crisis, etc. That name refers to a meaning and purpose that is specific. The first fundamental management concept, especially risk management, is to recognize the root issues. Once this is completed, it is possible to take appropriate steps. Sadly, as Shakespeare's Hamlet put it, this fundamental principle is upheld more in the breach than in observation.

What the Northern Rock did was to lend money to buy fixed assets backed by a mortgage bond, as if there were limited funds available to invest. This did not take into account the fact that there were, in fact, no unlimited funds. So assume someone wished to purchase a R1 million house. That individual would ask the Northern Rock for a loan of R1 million, which would be accepted without taking into account the fact that the Northern Rock had no R1 million to lend

The vendor will collect a R1 million check and deposit the check with his bank. The bank would then, for payment, contact Northern Rock. Then the argument is in the interbank scheme. Interbank transactions in South Africa can be processed in one day-South Africa has the most effective banking system in the world. The unpaid interbank account could be left uncleared for six months in the case of the Northern Rock and other UK banks. Interest was, of course, paid on the Libor (London Interbank Offer Rate) interbank balances.

The Northern Rock was unable to sell its bulked mortgages with the fall of the securitisation market. When these fell due, it could not refinance existing securitisation contracts. It meant that it was unable to clear their interbank accounts, along with other UK banks. The Libor rate is shot-up, and spreads. Banks lost trust in other banks ' ability to settle their interbank accounts and suspended interbank loans, contributing to the credit crisis. So the cause of the bank's bankruptcy and the credit crisis was the breakdown of the cycle of securitisation.