Emergence
On 12 September 2007, Northern Rock asked the Bank of England, as lender of last resort in the United Kingdom, for a liquidity support facility due to problems in raising funds in the money market to replace maturing money market borrowings.[9] The problems arose from difficulties banks faced over the summer of 2007 in raising funds in the money market. Despite Northern Rock appearing to be in a stronger position than other UK banks on paper,[10] it faced a liquidity problem because institutional lenders became nervous about lending to mortgage banks following the US sub-prime crisis.[11] Bank of England figures suggest that Northern Rock borrowed £3 billion from the Bank of England in the first few days of this crisis.[12]
Government intervention
With shares in Northern Rock plummeting by nearly a third, the British Government moved to reassure investors with the bank, with account holders urged not to worry about the bank going bust. The Treasury select committee chairman John McFall MP said: "I don't think customers of Northern Rock should be worried about their current accounts or mortgages."[13]
Northern Rock was not the only British bank to have called on the Bank of England for funds since the sub-prime crisis began[14] but is the only one to have had emergency financial support from the Tripartite Authority (The Bank of England, the FSA and HM Treasury).[15] However, the bank was more vulnerable to a credit crunch as its 'high risk'[16] business model depended on funding from the wholesale credit markets, 75% of its funds coming from this source.[17] In his address to the Treasury Select Committee, Bank of England governor Mervyn King had stated emergency funds would be made available to any British bank that needed it, but at a penalty rate, to ensure that lenders who had made bad lending decisions would suffer relative to lenders who had made sensible lending decisions.[18]
In December, the EU regulators approved Britain's actions to provide aid to the bank by concluding that it was in line with European emergency aid rules.[19]
Run on the bank
On Friday 14 September 2007, the first day branches opened following the news, many customers queued outside branches to withdraw their savings (a run on the bank).[20] This bank run was not the traditional form, where depositors withdraw money in a snowball effect, leading to a liquidity crisis; instead, it occurred in the aftermath of the liquidity crisis.[21] It was estimated that £1 billion was withdrawn by customers that day, about 5% of the total bank deposits held by Northern Rock.[22]
On Monday 17 September, as worried savers continued to flock to some Northern Rock bank branches to withdraw their savings, it was reported that an estimated £2 billion had been withdrawn since the bank applied to the Bank of England for emergency funds. By early afternoon in London, Northern Rock's shares, which had lost 32% on the previous Friday, fell a further 40% from 438 pence to 263 pence.[23]
Later that day, the Chancellor of the Exchequer, Alistair Darling, announced that the British Government and the Bank of England would guarantee all deposits held at Northern Rock.
Stabilisation
The announcement by the chancellor showed its intended effects the next day, as the queues outside Northern Rock's branches gradually disappeared. In addition, Northern Rock had a series of advertisements published in major UK newspapers to reaffirm that their customers' money was safe.[25]
In an interview on BBC Radio 4, Bank of England governor Mervyn King revealed that they had anticipated emergency funding to be in the £20–30bn range.[26]
What we want to do is to give incentives for people to behave properly, so in judging the interest rate at which we lent to Northern Rock we asked ourselves the question: "At what interest rate would they have to pay in borrowing from us today that would make them regret not having taken out an insurance policy as Countrywide did before the 9th of August?"
Boardroom changes
Matt Ridley was forced to resign as chairman in 2007, having been blamed in parliamentary committee hearings for not recognising the risks of the bank's financial strategy and thereby "harming the reputation of the British banking industry".[27]
John Devaney and Simon Laffin joined the board in November 2007, when Sir Derek Wanless, Nichola Pease, Adam Fenwick and Rosemary Radcliffe retired as non-executive directors. The chief executive, Adam Applegarth, stayed on in a caretaker role until December 2007. David Baker and Keith Currie left the board, but remained employed within the company. Currie later took early retirement with a bonus package reportedly worth £2.5 million, and in 2012, aged 56, was found dead at his home.[28]
The chief executive after the departure of Applegarth was Andy Kuipers, who joined the company in 1987, and later left on 31 August 2008.[29]
Growth of Bank of England loan
By January 2008, Northern Rock's loan from the Bank of England had grown to £26bn. On 11 January, Northern Rock announced that it had sold its portfolio of lifetime home equity release mortgages to JP Morgan for £2.2bn and that it would use this to pay off a piece of the Bank of England loan.[30][31]
On 6 February, the Office for National Statistics announced that it was treating Northern Rock as a public corporation, similar to the BBC and Royal Mail for accounting purposes, causing the loans (approximately £25 billion) and guarantees (approximately £30 billion) extended by the Bank of England and the value of the company's mortgage book (approximately £55 billion), provisionally estimated to total around £100 billion, to be added to the National Debt.[32] Although not technically a nationalisation, the decision effectively acknowledged that "In all but name, Northern Rock is now nationalised".[33]
Handling of the crisis
On 26 March the Financial Services Authority released an internal report into the failings over handling the problems at Northern Rock. "They found that their supervision of the bank had not been carried out to a standard that is acceptable". The previous FSA review had taken place in February 2006.[36] In the light of these failings at Northern Rock, the FSA announced that they would overhaul their own staffing and systems.[37] The FSA internal report also concluded that ultimately the blame for the collapse of Northern Rock should rest with the bank's senior management. "The boards and managements of regulated firms carry the primary responsibility for ensuring their institutions' financial soundness," the FSA said. The British Bankers' Association (BBA), the UK banking body, agreed.[38]
In May 2009 the Financial Times reported that banking regulators had been examining "war games" as early as 2004, which dealt with possible turmoil in the mortgage markets. HBOS and Northern Rock are thought to have featured in these predictions.[39]
Prior to the subprime mortgage crisis the bank was part of the FTSE 100 Index, but was demoted back to the FTSE 250 in December 2007.[41] The shares were later delisted.
On 31 March the bank released its annual report for 2007, it showed a loss of £167 million. The former boss, Adam Applegarth received a £760,000 (£63,333 a month) payoff.[42] The report also outlined further details of their proposed business plan.[43]
On 5 August the bank announced that it had made a loss of £585.4m for the first 6 months of the year and that £9.4bn of a loan from the Bank of England had been paid back, reducing the amount owed to £17.5bn.[44]
