Question

Northern Rock, a British bank, formerly a building society failed due to a number of risk management issues; becoming a casualty of the financial crisis of 2007.

You are required to conduct an internet search of this company and

• Identify the key risks and risk management issues which the Company was exposed to.
• What are the risk management lessons learnt from this case?
• Provide at least two (2) recommendations which the Company could have implemented to mitigate the risk areas identified. in 2500 words discuss

Answer 1

Northern Rock, a British bank, formerly a building society failed due to a number of risk management issues; becoming a casualty of the financial crisis of 2007.

Following are the key risk and risk management issues:

- failures of implementation in relation to both risk management and corporate governance frameworks that were aligned with accepted good practice;

- failed to implement adequate stress and scenario testing and risk reporting processes.

- Placing excessive reliance on certain tools at the expense of others

- Human/cultural weaknesses such as: ego, greed and ‘disaster myopia’ have a role to play in explaining the risk management decisions of financial institutions.

- sales cultures that promoted market dominance and rapid growth over traditional banking values like prudence, financial security and taking the long term view.

- complementary weaknesses in risk reporting and management competency in some financial institutions, at both the board and senior management levels.

- weaknesses in competency of risk management staff – which were not always able to communicate effectively to senior management/directors or provide the kind of support that they needed like support for strategic decision making.

- Issues of sub-prime lending due to competitive pressures.

- regulatory failures for its designing and their implementation

Risk Management Lesson learn from this case is that:

- Rethinking require for necessary regulation

- Analysing scope for improving internal control

- Better to understand and learn from other competitive organisations

- Revamping requires in Salary and their paying structure

- Improvement required in promoting in analysing risk culture

Following are the recommendations to mitigate the risk areas identified:-

1. Enhancing the stability of Financial System:- It includes

- Develop regulatory paradigm

- Introducing capital is not the only solution

- Managing the process how they are implemented

- Promoting proper marketing incentives

2. Reducing their exposure to future financial crisis

- Improving risk culture

- Redesign compensation structure as per the requirements

- Learn lessons from Non-Financials Sectors

- Improve internal control by assigning role of board, Chief risk officer etc.