Northern Rock’ Crisis
Northern Rock is one of the top mortgage lenders in the United Kingdom. According to Council of Mortgage Lender statistics, the bank was ranked one of the top five mortgage bank. The bank served loans, insurance and savings account as their core business. Some secured loans also have been promoted to their existing customer. That loans business was underwritten by Ventura. For home and contents insurance, it was administered by AXA. While, Legal & Generals was arrange stock market based investment and insurance for Northern Rock.
The bank went to FTSE 100 index in 2000. However it was downgrade to FTSE250 in December 2007 because the crisis that has been faced. The bank caught crisis by subprime mortgage financial crisis that happen at US. Consequence of the crisis, the bank has credit markets problems. It need more cash to support their running business. It received liquidity support facility from Bank of England. The reasons bank get into crisis because the subprime mortgage that have been face by Lehman Brothers. The bank had moved to make a deal with Lehman Brother before, which the risk was being underwritten by Lehman Brothers.
The starting point of the crisis is the bank business plan itself. The bank involved heavily borrowing to UK and international market. The bank extends mortgages to customer and then resells to international markets. This is known as securitization. The business plan for the Northern Rock bank is to raise money from securitization. However, when the crisis in August 2007, the bank faced liquidity risk because of the dropped demand from investors for securitized mortgage. The bank did not ha...