Hi, need to submit a 2500 words essay on the topic The Impact of the Global Credit Crisis On Northern Rock of the UK.
According to Euroweek’s analysis, the market appears to have lost confidence in Northern Rock because it is perceived to be an aggressive mortgage lender, and because of the fact that it relies on the wholesale markets for funding. Thus, with the then current weakness in the liquidity market and the negative perception of the mortgage market (although the UK’s own mortgage market remained stable), Northern Rock suffered largely because of market sentiment. This is bolstered by information from Dealogic databases that Northern Rock had no near term large redemption in the commercial paper or bond markets. it was merely denied credit by other banks at usual prices (Dammers, 2007).
Three days after the initial news, the government announced that it will guarantee all Northern Rock savings deposits, in order to calm an increasingly apprehensive banking public. By this time, share prices of other financial institutions, such as Alliance & Leicester, had begun showing signs of panic sell-offs by as much as or more than 30%. The share price drop triggered bank runs, particularly in Northern Rock branches where long queues of depositors took out as much as £2 billion. It appeared that investors were not convinced by government assurances that their deposits are secure so withdrawals are not necessary.
By October 12, BoE announced it would extend support to Northern Rock until February 2008 (Euroweek, 2007), although the worsening situation for the industry, in general, turned out to be more serious than originally thought. By August of the following year, news centred on efforts at restructuring the nationalised bank and concerns over the drain on the taxpayers’ purse by the £26.9 billion loan extended to the bank – which the company has already actually paid down to the government by 35% as of that time. Part of the remainder – about £3 billion – was converted to equity by the government. .