The Northern Rock Crisis

Essay by froodyUniversity, Bachelor'sB-, January 2008

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The cry for help was drastic, and the reaction extraordinary. Northern Rock, one of Britain's biggest mortgage lenders and latest victim of the American credit crisis required help from The Bank of England. The government ensured them a guaranty to solve their liquidity problems whereby the already confused customers became even more afraid to lose their money. Without avail, Bank Boss Adam Applegarth, called it "Business as usual" while Chancellor Alistair Darling tried to calm the enraged customers. (Northern Rock besieged by savers - BBC)On the morning of Friday September 14th the employees had to face big queues in front of their branch bank. ("Hit by a Rock" - The Economist) The customers wanted to withdraw their money out of Northern Rock because although the bank received a government guaranty the trust was gone. Furthermore that was not the only consequence the Northern Rock crisis caused that day. The Northern Rock shares lost about "29% of their value" ("Hit by a Rock" - The Economist) accordingly this burdened the European stock market.

The Northern Rock crisis shows how fragile the relationship is between customers and banks. Thereby Northern Rock became surely the victim of unfavourable and sometimes disproportionate market reactions as well as insufficient safety mechanisms.

Because of the comparatively low size of customer deposits, Northern Rock depends on funds that the banks loan among themselves on the financial market. "They refinance about 72% of their credits with capital market activities". (Northern Rock - Täter und Opfer - Handelsblatt) That is a very modern way of doing business and sometimes is eyed mistrustfully by other Banks. For that reason, many experts watched the crisis on the one hand with certain worries but on the other hand with satisfaction.

They even assumed the commercial bank and its aggressive marketing policy...