NORTHERN ROCK

Northern Rock's Difficulties Arose On Account Of Its Dubious and Aggressive Business Model

Northern Rock's Difficulties Arose On Account Of Its Dubious and Aggressive Business Model

Introduction

In late summer 2007, television viewers saw the lines of customers outside branches Northern Rock PLC, as news broke that the bank in times of crisis, panic in the way people thought they would lose their savings. It was the first? Run? on a British bank in more than one hundred years.

The purpose of this report is to figure out why it happened and to see if it could have been avoided. With BC management was in place and who or what was to take responsibility for this disaster?

Background

Northern Rock (NR) is a relatively young company which was founded in 1965 by the merger of two building societies, both of which were well established, however. The company has grown by buying smaller companies relative, the last in 1994. Later, the company is listed on the stock market to raise more capital. Because the company was founded as a mutual society and its existence was in the interest of the community, Northern Rock Foundation was established to facilitate fears that the company has been distancing himself (via floatation) from the community it was created to help initially. Northern Rock has become aggressive in their growth and decay before they were top 5 UK mortgage lenders.

Brave New World, which allowed banks like Northern Rock to grow so quickly, based on the securitization process, which converts the mortgage, credit card receivables and other financial assets in marketable securities and innovations it created in Structured Products. It was a revolution, which brought huge profits. But by financial investors and regulators the world are asking themselves whether it has also cost that is only now becoming clear. (Economist, Sept2007).

But the foundation of their business model was not hard, really it was risky, because they just borrowed money from other banks, they have a small deposit base, only 25% at one point, other banks, at least 45%, so they could use their own liquidity to finance lending. It was the subprime crash in the U.S., who began the conversation.

Yes, that unfolded in the U.S. was a dramatic effect on the financial markets, but it's just as much to do with how it has affected his contemporaries, who in turn hit Northern Rock, some banks in Britain had billions invested in the market sub-? HSBC £ 17 billion? Barclays £ 3 billion? RBS 3,5 billion pounds.

Northern Rock

It had to be explained by the risks taken by other banks, which led to them not to lend more money to Northern Rock. This is a global problem, as is now Bear Stearns (U.S. Bank) suffered the same fate as the NR, as the risk and loss go hand in hand. Northern Rock was a very risky business model, they borrowed money from other banks to package into securities and sell on the market, but other banks to cover their losses, they raised interest rates, ...