04. What went wrong?
Northern Rock Bank faced a bank run in the year of 2007. Main reason was the liquidity problem. The liquidity risk can be defined as the risk that a company or bank may be unable to meet short term financial demands. This usually occurs due to the inability to convert a security to cash without a loss of capital and/or income in the process.
The liquidity is a product of any bank. The bank should be able to meet the depositors demand in order build the trust of the customer and the entire banking industry is depends on the trust of the customer. Therefore it is important put more attention on liquidity risk.
Banks are profitable as an enterprise through their access to relatively cheap funding from core deposits. Depositors
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In late 2007, with turmoil in commercial paper market, depositors began to doubt whether they would get their funds back.
The Flawed Business
Northern Rock Bank initiates an aggressive and ambitious growth strategy pushed on back of Security lending. Due to the mentioned reason the corporate management was only focused on the growth and they have failed to identify the risk. Northern rock bank’s model was successful with the lack of liquidity as long as the bank prepared to lend.
06. Who were responsible? ( Regulators / Directors / Stake Holders )
Failure in Financial Service Authority (FSA)
Till 1997, Bank of England had been in charge of overseeing Banking system in United Kingdom. But this was changed in 1997, Vice chancellor of exchequer Mr. Gordon Brown freed the Bank of England from set interest rates. New institute of Financial Service Authority is established to monitor Banking
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Moreover it was important to protect people’s faith in government. Therefore the government did not make appropriate actions to safeguard shareholders. This situation impacted in adversely on individuals who invested their life hold investments on Northern Rock shares. In that sense government is acted in irresponsible manner in shareholders perspective.
Government of England made up a decision to nationalize Northern Rock after one month by taking over the ownership by removing share holders, which is common practice in history of United Kingdom. £20-30 billions are pumped in to safe guard existing depositors and avoid the collapsing of the bank which would have been affected to entire banking system in the country. Conservative Party with leadership of Mr. David Cameron is backed up on this decision in year 2008. But the transparency of the government was controversial since the government did not disclosed precisely how much of tax payers money is been pumped. Moreover if the Northern rock is failed to make its obligations, Prime minister Mr. Gordon Brown was unable to reveal about precise information.
Moreover, the conservative party highlighted the fact of involvement of Sir Richard Branson to acquiring the northern rock as a doggy deal.
Deep crisis of capitalism more fiasco on regulations and
Wells Fargo has been in business for over 160 years and was founded on March 18, 1852, by Henry Wells and William Fargo. The company opened its first office, in San Francisco, on July 1852. Wells Fargo served the West with banking needs, which included gold and paper bank drafts, and offered quick delivery of gold or other valuables. In1855, the first of many financial dilemmas took place when a drought made it impossible to mine for gold, and this caused almost 200 businesses in San Francisco to fail, but Wells Fargo didn’t fail, they prospered. In the early1860s, Wells Fargo acquired almost all the stage lines from the Missouri River to California, giving them a monopoly on transcontinental delivery services.
Many banks had collapsed or were substantially injured as the result of Black Tuesday. But it did have a little impact (Nash 334-336). The National Credit Corporation was composed of the major banks in the United States. NCC’s main goal was lending money to small banks in the United States in order to minimize the repercussions of the smaller bank’s crash. However the major banks did not want to lend money to the smaller banks because they were having problems themselves (Nash 336-337).
The Bank Charter Act (1844) aimed to restore confidence in a system that had suffered 4 major financial crises since 1819. The main problem was that banks could issue paper bank notes with no limits on the account. Some banks, having over-issued notes would then collapse due to insufficient gold reserves to back the paper currency. Peel concluded that the economy could only expand if the currency was stable. The aim of the Bank Charter Act was to regulate the new rules: no new banks were allowed to issue notes, existing banks were limited to their average issue of notes and the Bank of England was given greater control over banknote issues, which was linked to bullion reserves and securities.
What happened to all the banks then? Well first off people had complete trust in them, that is until the stock market crashed. Banks had invested a lot of money in the stock market also. But when it crashed they lost it all and
Depositors lost all the money stored in that bank. Because of this, consumers spent small amounts of money, which threatened many businesses. Meanwhile, farmers and factories were responsible for the overproduction of goods. Customers’ money was lost
This challenge put the national bank on hold for
As one bank failed people not even using that bank saw the panic and would withdraw their deposits even when a bank was not in any danger of failing. Because of the widespread panics that were driving banks out of business banks needed an emergency reserve so in times of panic they would have the supply to keep up with the demand of the withdrawals. Due to the severe panic in 1907, that wreaked havoc on the banking systems, it led to Congress creating the federal reserve act. The federal reserve regulates banks and makes emergency loans if they ever run short of money so there would be fewer panics. The federal reserve is known as the lender of last resort in times of crisis.
Due to the Dust Bowl farmers were defaulting on loans which was a huge cause of bank failures. Also in 1933, the Federal Deposit Insurance Corporation was created to ensure people's deposits, which now insures $250,000 per bank. Another big cause of the banks failing was because the Great Depression caused people to all withdraw their money at once, which created a huge run on banks. People still debate if the banking system collapse caused the great depression or if the great depression caused all the bank failures, and you can find evidence to show both sides were
JPMorgan Chase Bank has faced several lawsuits in recent years. They have been hit with cases concerning fraudulent misrepresentation, bribery, and many things in between. By studying the accusations the company has faced, one receives a better understanding of who is really handling their money. An act of fraudulent misrepresentation cost JPMorgan the fine of a lifetime.
This caused the new banks’ failure by issuing the Specie Circular order in 1836. The government land required payment to be in gold. The National Banks of United States collapsed, this caused what we know as the Panic of 1837, that Andrew Jackson’s successor had to deal with. This was much unorganized, banks got removed, etc. The lack of national banks was one of the many speculations that contributed policies that caused the market to crash in the year of 1837.
When banks failed, people that had money in their account, in the bank would lose their money even if they did not owe any debt to the bank. This caused families to go homeless and even
The national bank was incredibly biased in its working, which completely eliminated any equal opportunities for the nation’s people. The bank only favored those who were amongst the rich and powerful. For one, the bank has most frequently been run by those tied to Northern industry. Therefore, little funding or loans have been given to western expansion or to any other southern interests. In addition to these biased actios, Congress itself has granted exclusive privileges to wealthy bank stockholders.
In Addition to maldistribution stood the credit structure of the economy, some farmers were in deep land mortgage debt, so they lowered their crop prices in order to regain credit, and because the farmers were no longer accountable for what they owed banks. Across the nation the banking system found themselves in constant trouble. In America both small and large bankers were concerned for their survival, so they began investing recklessly in stock markets and granting unwise loans. These unconscious decisions would lead a large consequence, such as families losing their life savings and their deposits became uninsured. “ More than 9,000 American banks either went bankrupt or closed their doors to avoid bankruptcy between 1930 and 1933.”Although
Case Study 1: Banc One Corporation Asset and Liability Management Gizem Akkan So basically, the main problem Banc One Corporation has falling share prices as it is written from a 48 ¾ to 36 ¾ in April 1993. The basic reason behind this decline is that its exposure to derivative securities. This decline in share prices raises concerns among the Banc One’s Investors as well as its analysts since they are uncomfortable with huge amount of derivative usage particularly swaps. They think they are not able to measure risks they exposed so this create uncertainity about the firm’s financial stability.
Exposure to credit risk is managed in part by obtaining collateral and corporate and personal guarantees. Counterparty limits are established by the use of a credit classification system, which assigns each counterparty a risk rating. Risk ratings are subject to regular revision. Liquidity Risk Liquidity risk is the risk that the company is unable to meet its payment obligations associated with its financial liabilities when they hall due and to replace funds when they are withdrawn. GK’s liquidity management process, as carried out within the Group through the ALCOs and treasury departments includes: o Monitoring future cash flows and liquidity on a daily basis o Maintaining a portfolio of highly marketable and diverse assets that can easily be liquidated as protection against any unforeseen interruption to cash flow o Maintaining committed lines of credit Currency Risk Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates.