The Failure of Northern Rock in the Light of Banking Economics and Regulation
Introduction
Increasing global connectivity and integration in today’s world ensures that almost any serious problem has worldwide ramifications. The global financial system can serve as a key example of this phenomenon. Very recently, Britain’s fifth-largest mortgage lender Northern Rock was rescued by emergency funding from the Bank of England. This made the Newcastle-based firm the highest profile UK victim of the global credit crunch that had been triggered by the sub-prime mortgage crisis in the US. The bank run on Northern Rock that followed was unprecedented in recent UK monetary history. The Overend Guerney crash of 1866 was the last recorded bank run in the UK, before Northern Rock lost over £2 billion, starting on the 14th of September 2007.
Background
The run on Northern Rock can be considered as the most vivid indication of the contagion that consumed the financial markets around the world. The company did no overseas lending. Nevertheless, the spill-over effects of the failing US mortgage market sealed the fate of the company when the money markets that Northern Rock had depended on for years crashed at the start of August 2007.
The sub-prime mortgage market crisis started in the United States in the fall of 2006 and took hold as a global financial crisis by July 2007. Due to innovations in securitization, the risks from these sub-prime mortgages had to be shared more broadly with investors which essentially led to the ripple effects in the world-wide economy. The mortgages are generally repackaged into a variety of complex investment securities which are bought by institutions to diversify their portfolios. In the case of the U...
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...ultimate fate of Northern Rock is still undecided although a consortium led by the Virgin Group is the bank’s preferred bidder. Virgin contends to re-brand the bank as part of the Virgin Money business and proposes the repayment of £11 billion of the £25 billion loan that the Bank of England has lent to Northern Rock. Although some call for the nationalisation of the bank in order to secure saver’s deposits and provide affordable mortgages, the real debate revolves around the changes that have to be made in legislation and the regulatory issues that have to be addressed. Considering that a country’s financial system is now completely integrated into one global scheme and is subject to the interdependance within the system, the price is too great for the economy of any country for there to be any allowance of irresponsible risk on the part of an individual institution.
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Banks failed due to unpaid loans and bank runs. Just a few years after the crash, more than 5,000 banks closed.... ... middle of paper ... ... Print.
One year ago, on September 8, 2016 the Consumer Financial Protection Bureau(CFPB), the Los Angeles City Attorney and the Office of the Comptroller of the Currency (OCC) fined Wells Fargo Bank $185 million, alleging that more than 2 million bank accounts or credit cards were opened or applied for without customers' knowledge or permission between May 2011 and July 2015. This essay will discuss the Wells Fargo scandal by explaining how the event happened and describing how the organization approached handling a response to the crisis. This will be seen, firstly by describing the how the scandal happened, and what were the causes, secondly by discussing the reaction of the company in front of the situation, how they dealt with the crisis and then
The joint financial failures of the companies sparked a crash in the stock market. This served as a catalyst for a surge of bank failures because many New York banks were big investors in the Stock Market. The financial disaster began in New York and soon permeated its way throughout the country. Over a six-month period, over 8,000 businesses, 156 railroads, 400 banks failed, and 20% of Americans were unemployed By July of 1893, there was massive unemployment in factories and extensive wage cuts.... ... middle of paper ... ...currency.
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I guess most of you’ve heard the words Subprime Crisis again and again on TV when you were a middle school student 6 years ago. You may not know what it was when you were a child.
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In previous years the big financial institutions that are “too big to fail” have come to realize that they can “cheat” the system and make big money on it by making poor decisions and knowing that they will be bailed out without having any responsibly for their actions. And when they do it they also escape jail time for such action because of the fear that if a criminal case was filed against any one of the so called “too big to fail” financial institutions it...
The world woke up to the news of Wall Street collapsing in 2008 that threatened large numbers of financial institutions in the United States of America and across the globe. It is known to be one of the most financial crisis since the Great Depression of the 1930’s. The crisis was triggered by financiers from various lending institutions, Central bankers and other regulators who created the bubble in the financial sector. This had a domino effect across the globe triggering a massive bankruptcy across the financial institutions. Shares plunged in various stock markets in Americas, Asia, Europe, Africa, and Asia Pacific. That is an example of how interconnected (globalized) the world is, what happens in one part of the world can have an affect
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Warwick J. McKibbin, and Andrew Stoeckel. “The Global Financial Crisis: Causes and Consequences.” Lowy Institute for International Policy 2.09 (2009): 1. PDF file.