Question

Outline the story of Northern Rock’s bank run and the main causes of the bank’s failure.

Answer 1

Due to economic issues created by the subprime mortgage crisis, the British Labor Government nationalized the Northern Rock bank in 2008. The bank was divided into two components (assets and banking) in 2010 to assist the bank's eventual sale back to the private sector.

After the media, many clients queued outside branches on Friday 14 September 2007 to withdraw their money (a run on the bank). This bank run was not the traditional method in which depositors withdrew cash in a snowball effect, resulting in a liquidity crisis; instead, it happened after the liquidity crisis. Customers were estimated to have withdrawn £ 1bn that day, about 5 percent of Northern Rock's total bank deposits.

Police were called to the branch in Cheltenham, Gloucestershire in one incident when two joint account holders barricaded the bank manager in their office after refusing to allow them to withdraw £ 1 million from their account. Their cash was kept in an internet-only account, which they could not access after the Northern Rock website failed because of the quantity of clients attempting to log in.

As worried savers kept flocking to some Northern Rock bank branches to withdraw their savings on Monday, September 17, it was reported that an estimated £ 2 billion had been withdrawn since the bank applied for emergency funds to the Bank of England. In London early evening, Northern Rock's shares, which had lost 32 percent on the prior Friday, dropped from 438 pence to 263 pence a further 40 percent.

Rather than using customer deposits as the source of funds to lend out to homeowners, it borrowed in the international money markets.

When the sub-prime crisis hit America, those markets took fright, and stopped lending to anything that looked like it might be over-exposed to the housing market. Northern Rock was an obvious first casualty.

In addition, Northern Rock's bank run is a special case as it was a' reversed bank run.' Usually during a bank run, many depositors first withdraw their cash, for instance owing to absence of trust, and then the bank will get into a liquidity crisis as a consequence of the enormous withdrawals. The bank first came into a liquidity crisis in the case of Northern Rock, however, and as a consequence, depositors withdrew their cash from the bank.

The NR strategy has been at the same time the reason of fast increase and terrible drop of this bank. The point of contradistinction was an aggressive strategy that could allowed NR to compete against the Big of the sector.
At the same moment, the NR approach was the reason for this bank's rapid rise and horrible fall. The point of contradiction was an aggressive strategy that could enable NR to compete with the sector's Big.

Market risk increased with the use of securitization, more exactly what happened at NR was a particular market risk because the market changed the price of a particular tool (securities). Strictly linked to market price is the danger of interest rates, an issue that affects those organizations that have not matched their liabilities and assets maturity. As for market risk, even interest rate modifications have increased as a consequence of rising volatility within market interest rates