CASE STUDY

NORTHERN ROCK BANK

Northern Rock was Britains 5th largest lender especially in mortgage loans in November
2007. It had robust credit book and analyst were quite positive on its medium term out
look.
Less than 2 months later, Northern Rock collapsed. The run on Northern Rock was the
first in over 100 years in the UK. Liquidity had dried in the bank. How did it happen so
suddenly and so dramatically?
Northern Rock was not an international bank and it has no cross border exposure. It was
not major bank either. It was set up as a building society in 1965 but subsequently
enjoyed spectacular growth and expansion. Before the crisis, 80% of bank liabilities were
secured from securitization and whole sale funding. Retail deposits comprise about 20%
of its liabilities.
When sub prime crisis spilled over from US to securities and money market of other
countries, Northern Rock with its low deposit to loan ration was unable to renew its
other sources of short term financing. It turned to the Bank of England for financial
assistance on 14th September, 2007 in view of extreme conditions in financial market.
When the news broke, most retail customers rushed to withdraw their savings from the
bank. It was reported that in UK no bank has witnessed such a panic driven withdrawal
since 1866.
The committee of House of Commons in its report on Run on the Rock reported that
Northern Rock was a victim of its own funding structure. Its reliance on short term,
whole sale funding was responsible for its inability to cope with the liquidity pressure
placed on it when the international market dried up after the credit crisis in US.
In November 2008, the bank was nationalized after two unsuccessful bids of take over.
During the course of this trouble, the Northern Rock did not face any problem of
inadequate capital.

Questions:1. What type of risk Northern Rock faced?

2. What are the factors which influenced this risk?
3. What is your observation on funding structure of the bank?
4. Both capital and liquidity are equally responsible for solvency of bank- Is it correct?
5.
What
is
your
Key
take
away
from
this
case?