Mistakes of the Northern bank: Northern bank emerged in 1809 originated from Belfast based bank known as Northern Banking Partnership. Northern Bank has emerged over the passing years by performing consistently and meeting the changing needs of customers. Brief reasons leading to the Northern Rock Bank crisis are that they started giving excessive lending which was the important most factor of its downfall. The bank lent huge deposits which were more compared to the deposits they got from their depositors. Second reason was that there was liquidity mismatch which means that when Northern Bank gave high amount of deposits to the lenders they did not have sufficient deposit base to support their lending’s which encouraged them into borrowing money from the money market.
Third factor was Sub prime lending which means that there was a direct exposure of Northern Bank in sub prime mortgages which was eventually very less but after some time the mortgages started to climb high in the market. When U. S sub prime crises got hold and spreaded throughout the market, banks feared from lending mortgages from one to another.
Fourth reason of downfall is the global macro economic imbalance which means that there was instability in monetary terms and account deficits everywhere in the world especially United States and other European countries. Fifth reason was increasing intricacy of the securitized credit model, which has lower risk-free interest rates compared to other bank products leading to an intense search by customers for higher yield and a faster growth in the complexity of financial products. To prevent their collapse Northern Bank guaranteed the deposits to alarmed savers who were lined up to withdraw their funds.
A week before the crisis provoked, Northern Rock had come close to be acquired by Lloyds TSB, but there was no agreement because of funding problems, Lloyds could not get an agreeable committal of funding support from the Bank of England. When crisis occurred, Northern Bank found out that they could not secure cheap funds which were required and at that time credit elsewhere was not available or was very expensive. People rushed to withdraw their savings before government abide guarantee on savings, when first emergency loan was announced by Bank of England.
To get a breathing space and avoid emergency sale Northern Rock declared new arrangements with the Treasury and the Bank of England. The tripartite system accumulated the Bank of England, Financial Services Authority and the treasury was a bad concept in the design. Individual banks were to be supervised by FSA and the Bank of England who had the required resources acted as a lender in bad times. When problems aroused in US mortgage sector, The Bank of England was hit badly for not lending the adequate liquidity to the Banks.
(Green, 2007). Regulations and Supervision of Northern Bank: At that point Northern Bank was borrowing money from the money market and focusing on their short term profits which they thought would enable them to roll over the loans and when from the date of issuance the three month term would end, another would begin. Now the point where Northern Bank collapsed was when people were unable to repay their mortgage debts which caused the rate to rise at which banks used to borrow from other banks and many institutions stopped lending led to the collapse of Northern Bank after the hit they went to Bank of England.
Northern Bank made plan to downsize 1400 employees, with 4000 remaining and planning to manage. The alarming problem of Northern Bank is the failure executed by regulatory authorities. With 20-20 situation, the regulators should not have allowed maximizing its loan portfolio so rapidly. There is a moral fulfillment requirement by the regulators to safeguard that any bank with the required numbers of depositors is either precise expelled from any guarantee or is supervised to confine its divulgement to risky markets.
The Prime Minister constructed a regulatory system that was not suitable in purpose of dealing with systemic risk in whole banking system. To avoid the last crash the authorities now believe how the government should had regulated the banks. The obstacle was that all kinds of financial institutions such as insurance company, banks are scared of FSA who follow directly the regulations set by the government. The customers suffer as a result because the financial system is already scared of the FSA.
Keep yourself on safe side is more important than taking care of customers.