NORTHERN ROCK PLC

Northern Rock plc

Northern Rock plc

Introduction

The study is related to the basic functions of commercial banks in view of the collapse of the Northern Rock plc. For the commercial bank, it is important and essential to follow and work on the basic functions; however, it is also necessary that the commercial bank should focus on the economic conditions and should work according to the procedures. In the case of Northern Rock plc, it was observed that there was a collapse which basically took place due to mishandling of the basic functions of commercial banks that is mortgage allocation to the customers. Ina addition to this, it is also observed that the liquidity position of the Northern Rock plc was also in danger as due to the collapse, the investors or the depositors were also queuing up to take back their investment.

Collapse of Northern Rock plc

When the global demand for mortgages dropped in August 2007, Northern Rock plc became unable to repay loans from the money market.  As the credit crunch continued, it was forced to seek aid from the Bank of England for emergency funds. There was a breakdown of trust and sense of panic and led its customers to run on the bank. The panic stricken share holders continued to pull their money out of shares as the stock market continued unabated, with the FTSE 100 Index. The bank froze. The government injected 250 bn of money to prevent banking collapse and offered guarantee to banks issuing medium term debt, but in return it demanded dividend cuts and the end of big bonuses. Gordon Brown told a press conference that injecting 50 bn to recapitalize the banking sector is a “bold and far reaching solution” to the crisis. This damaged the company not only financially but its goodwill was also affected. The only option left was to nationalize the banks. As described by the Chancellor Alistair Darling the cost of nationalizing is double the amount the state has provided Northern Rock plc in loans (Moon and Bates, 1993, 139-152). Though some conservatives in United Kingdom were against the government act but there was no alternative proposal to save the bank.  Nationalization may be the least damaging choice. This was done to offer a “better value” to the government to attain the shares for nothing and then get rid after a period of transitory public ownership.

The relationship between the crisis in the mortgage market, already shaky global financial markets and the banking crisis in Britain is evident. Northern Rock makes a sale of equipment, secured by a mortgage, but for them because the crisis today there is no demand. In this case, according to British research firm, the amount of short term loans of the bank several times higher than the sum of its deposits, so it is highly dependent on financial conditions. So because of the global financial turmoil started to have problems with loans, Northern Rock was in a difficult situation. Money gets nowhere, and it is just amazing to see, it damaged the reputation of the ...