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The Failure of the UKs Northern Rock Bank - Essay Example

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The paper "The Failure of the UK’s Northern Rock Bank" describes that the NR case study highlights on the wisdom of computing the balance sheet, including all sections’ output by eying the total system other than its different sections, as something micro-correct could be macro-wrong…
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The Failure of the UKs Northern Rock Bank
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Download file to see previous pages Mortgage and personal loans were offered by the Bank in bundles up to 125% of the hypothecated value. Retail business deposits of the Bank were not compatible as the balance sheet grew; thus, the funding resources left to depend upon were the short-term wholesale market funds to match with the mortgage business growth. The NR issued and sold notes that ensured the buyer claim on the liquidity of the loan portfolio. New loans were bundled and the taken accounts were sold through asset-supported securities (Liikanen, 2012).
The news of NR becoming cash-deficient and going ‘cap in hand’ to the Bank of England (BoE) for funding was the first-ever run on a British bank since Victorian time (Duncan, 2008). Failures on the part of NR (The Times, 20 March 2009) were many. The Treasury took too much time in resolving the failures of Northern Rock. Primarily, the short-sighted business approach of the Bank made it the first to run to the BoE. No option was left before the Treasury than to nationalise the Bank to secure the investors’ stakes and of the whole financial system.
The Treasury did not check the NR from selling the toxic product, Together loan, by relaxing the loan conditions. The wrong lending policies were responsible for the Bank’s failure. Had all the stakeholders, including central banks, regulators and the treasury has taken precautionary steps, the collapse of the Bank could have been avoided. Treasury was completely oblivious of the financial market operations and the resultant risks to the economy (The Times, 20 March 2009).
According to Liikanen (2012), failure of the NR was caused by its institutional short-term investors not extending their credit lines. This problem was quite severe. The Bank losses in the wholesale market further ignited the scenario, as the Bank was depending greatly on short-term wholesale funding, which is settled when the credit term expired. ...Download file to see next pagesRead More
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