Loss management

Essay by robinmercerUniversity, Bachelor'sC+, June 2008

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At the end of the summer 2007, TV viewers saw lines of customers outside branches of Northern Rock plc, as news broke that the bank was in crisis, panic set in as people thought they would lose their savings. This was the first "run" on a British bank in over a hundred years.

The aim of this report is to look at why it happened and to see if it could have been avoided. What BC Management was in place and who or what was to shoulder responsibility for this catastrophe?MAIN BODYBACKGROUNDNorthern Rock (NR) is a relatively young company which was founded in 1965 through the merger of two building societies, both of which were well established themselves, however. The company grew by buying smaller mutual societies, the last in 1994. Later the company floated on the stock market to raise more capital. Because the company was founded as a mutual society and its existence was to benefit the community, the Northern Rock foundation was established to ease concerns that the company was distancing itself (through floatation) from the community it was set up to assist originally.

Northern Rock became aggressive in their growth and up to their collapse were the 5th largest UK mortgage lender.

'The brave new world that enabled banks like Northern Rock to grow so fast is founded on "Securitisation"-the process that transforms mortgages, credit-card receivables and other financial assets into marketable securities-and the innovation it spawned in "structured" products. This was a revolution that brought huge gains. But across the financial world investors and regulators are asking themselves whether it also brought costs that are only now becoming clear'. (Economist, Sept2007).

But the foundation of their business model was not solid, indeed it was risky as they only borrowed money from other banks, they...