About ethics 5 - Assignment Example

The bank was unable to garner sufficient funds from its retail arm through deposits to show sufficient growth on the balance sheet. As a result, the Northern Rock started depending on easily available short-term wholesale market funds to boost its growth. Northern Rock started issuing and selling notes that offered the buyer the right on the capital of the loan portfolio. New loans were bundled and the prevalent accounts were sold through asset-supported securities (Liikanen, 2012). Nothing happened all of a sudden, as by 1995 the worth of capital with the bank had begun deteriorating sharply.

In 2005, debt of lower value released in 2001 was equalled to equity. It reduced the margins over the debt value greatly. The bank was not getting better margins from traditional market but it could not control the tightly defined leverage from bursting to a factor of 90 and more (Liikanen, 2012). The Northern Rock announced insolvency on September 13, 2007, asking help from the Bank of England (BoE). Immediate effect of this declaration happened on the bank retail segment customers who had deposited money in various personal accounts.

These account holders had lost faith in the capability of the bank to pay back their deposits and the very next day there were long lines of customers in all branches of the Northern Rock to withdraw their funds from the bank. . Bankruptcy of Northern Rock was due to stepping back from their credit lines by the institutional short-term investors of the Northern Rock. Before the announcement of insolvency, withdrawing back of the short-term institutional investors was a grave issue for the bank before 14 September.

The real set back to the bank was faced in the wholesale market when the news broke out that the Northern Rock was arranging money largely from the short-term wholesale funding, which it settled at the time of credit maturity (Liikanen, 2012). Inter-banking problem of Northern Rock and other financial organizations largely stemmed from the deficiency of trust among banks and the inter-banking market. Generally, inter-banking market is always brimming with funds across the world but liquidity just vanished from the market.

Retail depositors’ rushing to the bank branches for withdrawing money happened at a time when crisis at the Northern Rock had occurred. Amazing thing was that during the difficult time of cash shortage crisis, the retail segment of the bank business was shown as the major revenue stream of the Northern Rock. In the end with the huge downward plunge in the share price of Northern Rock from ?12.50 in January 2007 to below ?1 at close of the year 2007, the bank was taken over on 17 February 2008 (Liikanen, 2012).

The crisis of the Northern Rock was managed with the financial aid given to it by the Bank of England. After nationalization, all its debts and losses were borne by the government. Certain clarity emerges behind the cause of crisis or failure of the Northern Rock, which is significant to mention to remove ambiguity over its failure. The Northern Rock banking business model failed not because of its borrowers, nor a long line of customers waiting