Northern Rock Bank Case Study

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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

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