BUSX 38822 Money- Banking And The Financial Crisis

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BUSX 38822 Money, Banking And The Financial Crisis

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BUSX 38822 Money, Banking And The Financial Crisis

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Course Code: BUSX38822
University: The University Of Chicago

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Country: United States

Questions:
1) What made Northern Rock’s business model particularly fragile?
 
2) What were the two types of “runs” that Northern Rock experienced? How is what Northern Rock experienced different than a “traditional” bank run? 3) What key regulatory change would address the fragilities Northern Rock illustrates? (Of course, many possible reforms could be relevant. Please focus on one you believe would be particularly important.)

Answers:
At the time of credit shortage in United Kingdom, this was in the year 2007; Northern Rock became the first financial institution that suffered a bank run in 140 years. Bank run is the phenomenon when bulk of customers withdraws their account from a bank. Northern Rock could not find a private buyer and the bank had to go public in the year 2008 (The Rise and Fall Of Northern Rock 2017).
Northern Rock was advised and warned about the steep asset increment process, undermining and strategically under pricing of the risk associated with credit, along with few other credit derivative tools like the collateralized debt obligations and credit default 14 introduction swaps  were not enough to hold on to the assets of the institution.
Northern Rock was known to be dependent on funding the wholesale market; this exposed the institution to the liquidity risks. The organization was also warned by the Bank of England and Financial Services Authority regarding this outlook as well.
Apart from the internal financial policies and operations of the Northern Rock some of the external environment which is not under the direct control of the management of any company is also equally responsible for the downfall. The country’s deposit protection scheme was not functional, there were no rules regarding the special cases like bank runs r bankruptcy of financial institutions. There is also a lack of an official institution for financial supervision and also to act as a fall back options for institutions during a crisis that Northern Rock had faced. 
Media has also played a great role in increasing the rate of withdrawal as that pictures of long queues outside the bank was flashed all over (Goedde-Menke et al. 2014).  
Northern rock experienced a deposit demand run and a run due to the credit crisis in the first place. The perception among the customers of a financial institution that the organization is on the edge of insolvency, the customers start withdrawing from the bank’s demand deposit accounts. As more and more customers withdraw their funds from the bank because of this perception, the actual risk of insolvency or default escalates, which in turn increase the withdrawal rate.
The hit on northern rock is different as the institution after going public was able to stabilize itself. In a traditional run on the bank the organization has no looking back option and has to shut down (Linsley, Philip and Slack 2013).
For any financial institution or any other organization for that matter, it is very important to keep up and upgrade the operating process and develop policies according to the changes of the external business environment. In case of Northern Rock, I feel the credit policies were not keeping mind the dynamic shift of the economy that the country is always going through. The polices were all set and implemented the way they were initially done keeping in mind the wholesale business, which was one of the major drawbacks of the institution. Northern Rock case was also escalated to the peak with the help of media. People were scared that their money is going to be lost forever and hence they opted to withdraw their money, which in turn made the situation even worse (Goodhart 2016).   
Reference list: 
Goedde-Menke, Michael, Thomas Langer, and Andreas Pfingsten. “Impact of the financial crisis on bank run risk–Danger of the days after.” Journal of Banking & Finance 40 (2014): 522-533.
Goodhart, Charles AE. “Run on Northern Rock, the.” In Banking Crises, pp. 271-281. Palgrave Macmillan UK, 2016.
Linsley, Philip M., and Richard E. Slack. “Crisis management and an ethic of care: The case of Northern Rock Bank.” Journal of Business Ethics 113, no. 2 (2013): 285-295.
The Rise and Fall Of Northern Rock. 2017. Telegraph.Co.Uk. https://www.telegraph.co.uk/finance/newsbysector/banksandfinance/11032772/The-rise-and-fall-of-Northern-Rock.html

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