AcknowledgmentsAbstractThe central theme of this paper is related to the multi-dimensional problem of Northern Rock. The paper tries to speculate the complex set of inter-related problems of this financial institution and thereby analysing all kinds of solution that can be derived from it. The focus is on the persuasion of liquidity management and the analysis of subject to more rigorous stress tests in reference to the banking context. In this particular paper the understanding of crisis has been sorted out by a comprehensive analysis of the problems faced by Northern Rock. The attempt is to derive certain solution for futuristic application. Table of ContentsAcknowledgmentsAbstractTable of Contents The List of TablesExecutive SummaryintroductionConclusionReferencesBibliographyThe List of TablesFig.
1 Spreads of international three-month interbank rates to three-month expected policy ratesFig. 2 An integral conceptual modelExecutive SummaryThe target of this paper is to lay emphasis over the comment "LPHI risks tend to induce disaster myopia so that such risks are discounted altogether and the probability is assumed to be zero. " I am trying to check this particular comment in reference to the Northern Rock. The context has been sorted out from David T.
Llewellyn, ‘The Northern Rock crisis: a multi-dimensional problem waiting to happen’, as published in Journal of Financial Regulation and Compliance, in the year 2008. This paper is the understanding of the scenario as taken place in Northern Rock and the derivative solutions related to it. The purpose of the paper is to elaborate the need of greater transparency in financial instruments and the application of regard to banks’ risk exposures including their off-balance-sheet vehiclesintroductionThe incident related to the Northern rock is an absolute condition that needs to be studied for the purpose of risk management.
It is in its own way one of the major incidences related to bank crises. The purpose of this paper is to make the assessment of multi-dimensional nature of the whole episode. The perception that holds is that NR always opted for a significant business model (Schwartz, Barry; 1990). The structure was all led through originate-and-distribute methodologies. Unlike many banks NR never scrutinise its assets at the margin. The securitisation is always relied on short-term market funding. The basic ingredient that made this bank one of those particular financial institution is its strategic outcome related to the low-probability-high-impact (LPHI) risk.
As a consequence the bank was totally dependent over the short-term funding. On the contrary the liquidity in the markets was unpredictable. There were chances that it gets evaporated suddenly on a large-scale. This is what is considered as the nature of LPHI risk and this paper is making an evaluation of this nature and its impact over the financial set up. HM Treasury (2007), states that there is no denial to the fact that the business model was successful for a small span of duration.
The LPHI risk emerged in global financial turbulence. Its chief focus was on SPM lending in the USA. NR had no part in it and thus claimed that it is the victim of this turbulence without any reason. According to McGregor D. (1960), the applied strategy of the bank landed it up with the risk initiated by LPHI. This is the risk that is very much associated with a state of drying-up of liquidity (Goodhart, C.A. E.
2007). This was very much an unbalanced part of the London financial markets and several fault-lines came up on the part of NR. Healey, J. (2001), discovers that the process of implementation of securitisation by NR with over-reliance on short-term market instruments was not validated well. Subsequently the management of LPHI risks in banks were handled and the effect was directly proportionate to the deposit protection regime in the UK.