What is happening in the developed world today is one of the worst economic meltdowns of modern history. The financial institutions are trembling like nothing else whereas the impacts of such a failure of financial institutions are clearly felt by the rest of the world as well. The reductions in consumer spending, the increasing level of unemployment as well as forecasts of negative growth are some of the aftereffects of this economic downturn.
In the wake of these crises, there are many important concerns which are being expressed as the potential effects of the credit crunch can easily be felt against other economic variables too. (Campbell, 2008).Apparently, the current crisis may be attributed to the subprime lending made by the different financial institutions. However, at the core of it is a whole plethora of different variables which are not only correlated with each other but also created a combined effect on different macroeconomic variables too. The failure of financial institutions to regularly check in their appetite for taking more risk not only resulted into the current credit crunch but also indicated the degree of the regulatory control over such institutions to discipline their behavior.
Northern Rock is such a financial institution in UK which required intervention from the government because of its apparent failure to sustain the losses incurred due to subprime mortgage episode.
In this research study, the current credit crunch will be discussed with special focus on Northern Rock as a firm requiring official intervention.
[...] The primary factor behind the failure of Northern Rock was the fact its business model was unique and relied heavily on the capital markets for securing funds to make the lending. However, as the world's capital markets started to shrink owing to credit crisis in US, the same effect was carried over to the capital markets of the UK too. Thus depositors started to withdraw their money from their accounts in Northern Rock- according to one estimate more than one billion pounds were withdrawn- creating serious funding problems for the bank to continue to remain solvent in foreseeable future. [...]
[...] Northern Rock too engaged into such business practices where it went far too ahead of its capabilities to manage the down side risk of such transactions. (Atkinson, et.al. 2008). Northern Rock The run on Northern Rock was one of the most severe blows to the financial system of UK as many realized how fragile UK's financial system can be as this run unfolded a burning volcano in the financial sector of UK.(Keasey & Vernoesi,2008). Northern Rock was the fifth largest mortgage lender in the country and run on it was the first on any British Bank in almost a century as the prevailing funding related problems forced the bank to seek official help from the British Government. [...]
[...] Dr Partha (2005). UWS economist reveals the role of globalization in the current financial meltdown. Available: http://pubapps.uws.edu.au/news/index.php?act=view&story_id=2344. Last accessed March Gentle, Chris. (2008). How the credit crunch has its roots in the lack of integrated governance and control systems. The Journal of Risk Finance pp: 206-210. McIlroy. David Halliday (2008). Regulating risk: A measured [...]
[...] Northern Rock was the victim of its own policies which it pursued in order to achieve rapid growth as it went on to become fifth largest mortgage lenders in the country. Run on Northern Rock was first of its kind in UK in almost a century however, it left behind a trail of events which clearly points out towards the failure of modern finance to regulate itself into more prudent and conservative way so that the interests of all the stakeholders could have been saved. [...]
[...] Therefore, due to this anomaly in the very role of financial institutions, there was a wider gap between the regulation as well as the actual banking practices prevailing in the industry. The above were some of the theoretical reasons which are often cited as the key reasons behind the failure of Northern Rock as a successful financial institution and have to ask for official assistance and intervention from the British Government. Following section will detail the circumstances leading to this episode. [...]
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