Northern Rock Bank: an english exemple of the sub-prime mortgage crisis

Résumé du document

One of UK's largest mortgage lenders is The Northern Rock. Northern Rock has become the highest profile (UK based) victim of the fallout from the global credit crunch. The reference to the credit crunch is the one which stemmed from the sub-prime mortgage crisis in the US. The Bank of England pitched in to grant emergency financial assistance to Northern Rock. This support from the bank of England was mainly to prevent Northern Rock from reaching a devastated state. Northern Rock is one of the top five mortgage lenders in the UK in terms of gross lending. In addition to mortgages, the bank also deals with savings accounts, current accounts, loans and insurance policies. Providing secured loans to its existing mortgage customers is also one of the prime services provided by Northern Rock. In September 2007, Northern Rock asked the Bank of England, to serve and act as the ?lender of last resort' in the United Kingdom. This strategy was adopted to increase the liquidity position in the bank. The bank's (Northern Rock) assets were always sufficient to cover its liabilities. However, it suffered from a liquidity crunch because institutional lenders became nervous about lending to mortgage banks following the US sub-prime crisis.

Extraits

[...] Demutualization is the process by which a customer- owned mutual organisation changes legal form to a shareholder-owned public company. Throughout this period a concern against demutualisation was that the assets of a mutual society was built up by its members throughout its history not just the present members who would benefit, and that demutualisation was a betrayal of the community that the societies were created to serve. Northern Rock chose to address these concerns by founding the Northern Rock Foundation. [...]

[...] On 22 February Northern Rock was formally nationalised. It is a temporarily nationalisation until the financial markets become more stable. Summary Indicative Bibliography - The subprime solution: how today's financial crisis happened and what to do about it. Robert James Shiller, Princeton University Press - The new paradigm for financial markets: the credit crisis of 2008 and what it means. Georges Soros, New York: PublicAffairs, 2008. [...]

[...] We can take under consideration the dividend payment information. Payment date Dividend per share (pennies) 25/05/ p 30/05/ p 29/05/1998 7p In 2006 the bank had moved into sub-prime lending via a deal with Lehman Brothers. Although the mortgages are sold under Northern Rock's brand through intermediaries, the risk is being underwritten by Lehman Brothers. Sponsorship The company sponsored many local sports clubs and events, including Newcastle United Football Club, professional golfers and the cycling festivals. The sponsorship of Newcastle United from 2005 to 2010 is worth million. [...]

[...] Nationalisation On 17 February 2008, Alistair Darling, the Chancellor of the Exchequer, announced that Northern Rock was to be nationalised claiming that the private bids did not offer "sufficient value for money to the taxpayer" and thus the bank was brought under a "temporary period of public ownership".The government would be the shareholders and manage the Bank at "arms' length" on a commercial basis. Customers were not affected by this change. A Government-appointed arbitration panel would decide on a fair price for the compensation to be offered to investors for their shares. Prior to the markets opening on 18 February, trading in Northern Rock's ordinary and preference shares was suspended. [...]

[...] On 17 September, as worried savers continued to flock to some Northern Rock bank branches to withdraw their savings, it was reported that an estimated billion had been withdrawn since the bank applied to the Bank of England for emergency funds. Northern Rock's shares, which had lost 32% on the previous Friday, fell a further 40%. The British Government and the Bank of England announced that they would guarantee all deposits held at Northern Rock. Northern Rock shares rose by 16% after this was announced. By January 2008, Northern Rock's loan from the Bank of England had grown to £26bn. [...]