Northern Rock Case Study

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Register to read the introduction… During August 2007 in Germany, a rescue package of €3.5 billion was arranged by the German government for the country’s IKB Deutsche Industriebank AG which had also been afflicted by the US sub-prime market crisis. The whole affair, however, was handled much more cautiously with the public being given no serious indication towards the extent of IKB’s plight. The rationale for this type of secrecy, in the event where wide-spread panic has not yet occurred, was set out in a speech by Eddie George, Governor of the Bank of England in 1994 (cited in Financial Stability Review, 1999, p. …show more content…
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
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(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

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