International Finance and Banking - Essay Example

In 1965 the Northern Rock Building Society was formed as a consequence of union between the two North East building societies. The bank was nationalized in 2008. Concise summary of the facts of the case In the year 2007, the country of United Kingdom experienced the bank run for the first time in over 140 years. At that time the bank under consideration was not significantly large as it was ranked 7th taking the total assets in consideration. But the bank played a significant role in retail banking business.

The bank also had its mark as a mortgage lender. About a decade ago, the bank transformed itself from a mutual building society to retail deposits as well as mortgages. The depositors queued outside the bank to withdraw the deposits. It was feared that it could shed its impact on the deposits of the bank. After repeated attempted failures to secure a purchaser operating in the private sector, the government took the initiative to nationalize the bank. The bank now operates as a bank that is fully owned by the state.

Since then, the government has acquired substantial stakes of equity in other banks of Britain as a part of the general program of re-capitalization (Llewellyn, n.d. p. 1). After the Bank of England made an announcement on liquidity support on an emergency basis for the bank, the depositors started to queue up outside the branches with the objective to withdraw the deposits they made in the bank. The television news channels broadcasted the news that the bank has sought for the support of bank of England on the previous evening.

However the damage was complete well before the run made by the current account holders. A sign of subprime crisis could be felt from the month of July in the markets for short term funds. The crisis began to apply stresses on the balance sheet as well as the off balance sheet items sponsored by the bank. The bank depended heavily on non retail funding. The retail deposits constituted only 23 percent of the liabilities till the summer months of the year 2007. The short term borrowing constituted the rest of the funding.

(Shin, 2008, p. 3). The above figure shows the beginning of the situation of crisis. The ABCP or Asset backed commercial paper was regarded as the favoured way for the vehicles of off balance sheet to fund the holdings of mortgage that are related to assets. But the real question which came up in that situation was not directed to find the reason behind the running of the retail depositors. Decision makers were more concerned on sudden drying up of the short term deposits which the bank enjoyed before the month of August, 2007.

More emphasis was given on to find the reason on why the lenders operating in the market for capital suddenly decided to deny lending to other banks. (Shin, 2008, p. 10). The above figure shows the comparison of liabilities of the bank both before and after the run. The bar on the left hand side shows the main components of the liabilities of the bank at the end of the month of June, 2007 (Rafferty, 2008, p. 4). The bar at the right hand side shows the liabilities after the run and support in terms of liquidity by the Bank of England.

The most glaring picture which comes out from the figure is the difference of the liability to the Bank of England at the end of the year 2007. Response of the financial markets A problem for all banks during the middle of the year, 2007 was the turbulence in the