Northern Rock Term Paper

6719 Words27 Pages
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The Case of Northern Rock
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Table of Contents 1 Scope of Study 3 2 Introduction to the Northern Rock Debacle 3 2.1 Introduction to Northern Rock’s Business Model 4 3 Internal Analysis 7 3.1 Analysis of Northern Rock’s Balance Sheet 2006 7 3.1.1 Northern Rock’s Sources of Funding 7 3.1.2 Asset and Liability Maturity Mismatch 2006 8 3.1.3 Peer Group Ratio Comparison to Assess Northern Rock Liquidity Risk 2006 9 3.2 Exposure to Low Probability High Impact (LPHI) Risk 10 4 Analysis of Market Condition 10 4.1 U.S Sub-prime Mortgage Market Crisis 10 4.2 Consequences of U.S. Sub-prime Mortgage Market Crisis 11 4.3
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Alas, due to the worsening financial markets and inadequate regulatory oversight, Northern Rock was finally nationalized as the financial crisis claimed one of its largest victims in the ensuing aftermath.

2.1 Introduction to Northern Rock’s Business Model
Figure [ 1 ] Total Assets of Northern Rock (Northern Rock Annual Report and Accounts)
Figure 2: Northern Rock Annual Report and Accounts
Figure 1: Northern Rock Annual Report and Accounts
Northern Rock embarked on an intensive growth strategy when it demutualised from a building society to a stock-form bank in 1997. Instead of relying on traditional customer deposits to fund its growth, Northern Rock relied more on wholesale funds to sustain Northern Rock’s operations.

Figure [ 2 ] Profits of Northern Rock (Northern Rock Annual Report and Accounts)
This strategy of “originate and distribute” model of funding was the brainchild of Northern Rock’s Chairman, Adam Applegarth, and it thrived as shown by the tremendous increased in asset size and profits of the banks over the years. After demutualising in 1997, Northern Rock’s assets grew each year, and in a span of a decade, it expanded its assets by 6-folds, from $15.8bn to $109.3bn pounds (NR, 2007).

Also as seen in Figure 2, Northern Rock has increased its profit by more than 9-folds in the same time period to $395m pounds. Lastly, it also became the third-largest lender in, with 18.9%(British Broadcasting Corporation, 2008)
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