Northern Rock Case Study
General public opinion is in favour of the notion that the permission granted for a business model like Northern Rock’s to exist, demonstrates a fundamental flaw in the current regulatory regime. It can be said that the authorities failed to recognise the risk attached to the bank’s funding model and that Northern Rock’s business methods made it unduly vulnerable to wholesale money market volatility.
To some extent, the Tripartite arrangement between the Treasury, the Financial Services Authority (FSA) and the Bank of England also caused some hindrance in a more effective management plan for the crisis of Northern Rock. Under the system, which was set up by Gordon Brown in 1997 when he was Chancellor, the Bank of England has the liquid financial sources to carry out the bail-out of a troubled bank, the FSA has all the supervisory information which it receives from regulating and monitoring individual banks, while the Treasury confirms the release of any funds from the …show more content…
(2007) Northern Rock: Solutions and Problems. Sage Publications). Policies encouraging liquidity insurance could have pressured other banks to make long-term loans to Northern Rock if it had insured with those banks. In effect, liquidity insurance would have helped to recycle the deposits from other banks to Northern rock, preventing the panic and the ensuing run. In the event of banks not lending to each other during inter-bank market dry-ups, liquidity insurance would take over with the insurance contracts compelling the banks to provide funds to those banks which need