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Northern Rock crisis Essay

Northern Rock

1. Discuss your understanding of the way in which Northern rock had been managed prior and during its crisis. Draw upon relevant management theories and assess what lessons can be learned to manage Northern Rock better.

The management of Northern Rock is having a problem with regards to how they will handle international issue of the sub-prime mortgages. The management of the company has been able to handle the situation by initiating some strategies like having a partnership with other banks like the Bank of England. In addition, they also attempt to manage it through the use of international management approach where they try to use what other banks in the global market use.

Northern Rock will be analyzed internally, through the use of SWOT Analysis. SWOT Analysis stands for Strengths, Weaknesses, Opportunities and Threats that an organization has in order to maintain being at the top of other competitors. One of the strengths of the company is with it comes to engaging themselves to international aspects to provide the needs of their target market, especially in housing. However, their strength has also lead them to their weakness as they are not able to intercept probable problems that occur which lead

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them to the crisis. The threat for the company is when a new bank occurs that provides the needs of the target market and the threat of being acquired by the bank of England and lastly, their opportunities is to have a new management approach to that will handle their current situation and help them achieve competitive position despite of the issues they faced.

2. Critically evaluate the argument presented by the management of Northern Rock that events were `unforeseeable` and could not have been avoided. Illustrate your answer in light of your understanding of a strategic analysis of the business environment.

Northern Rock Plc formerly known as Northern Rock Building Society is a UK bank which is currently owned by the government. The NRBC was established in 1965 as an outcome of the merger of the Northern Counties Permanent Building Society which is established in 1850 and the Rock Building Society which has been established in 1865. In the 30 years of the company, the Northern Rock has expanded through the acquisition of 53 smaller building societies which include the North of England Building Society in 1994. Along with many other British building societies in the 90s, the Northern Rock opted to float and demutualise on the stock exchange so as to expand their business portfolio.

The Northern Bank was formerly established in 1997 when the UK society floated on the London Stock Exchange distributing portfolio shares to their members who held mortgages and saving accounts. The bank has joined the stock exchange being a minor bank and was expected to be taken over by its considered larger competitors; however, Northern Rock has still remained independent. The company has gained their promotion in 2000 to the FTSE 100 index. However, because of some reasons, they have been demoted back to the FTSE 250 in December 2007 (BBC, 2008) and on the following months, Northern Rock has been suspended from the LSE because of the nationalisation of the bank. On September 14, 2007, Northern Rock sought and has received a liquidity support facilities from the Bank of England (Bank of England, 2008), following issues in the credit markets which is caused by the US sub-prime mortgage financial crisis. It has been said that this crisis has brought enormous impacts to the bank and their organisational performance.

Because of the unexpected and unforeseeable situation in the international market, especially in the sub-prime Market, management of Northern Rock have argued that the issues faced by the company is very unpredictable. The arguments of the management of Northern Rock emerged because of the compounded problems that they experience since the institution have received most of its fund in large values from institutional lenders rather than small depositors which are more stable source of fund than others (Lim, 2008). According to some sources, Northern Rock’s account holders have withdrawn about £1 billion or more than $2 billion in 2007 after Northern Rock turned to the Bank of England for an emergent credit line. However, this issue still remains unconfirmed (IHT, 2008).

Although the reasons for this apparent shortage of liquidity are not known, Northern Rock management would have needed sufficient liquidity to adjust with a withdrawal of wholesale funding for more than a month so as to avoid needing assistance or help from the Bank of England. It is not likely that a change to liquidity regulation would help the banking institution.

Some scholars have drawn attention to the sorts of transformation which would prevent banking and financial institutions to be affected by runs (King, 2007); In line with the Northern Rock, many of its account holders withdrew their deposits to deposit it to other banks. For the most part, these depositors did not ask for cash. If Northern Rock has been insured with other banks, then the insurance policies might have allowed the banks to make long-term loans, to provide them with enough funds which they need to adjust with the loss of account deposits. In this regard, liquidity insurance in effect would attempt to recycle deposits from the other banks to the institution which is Northern Rock. With this, these insurance contracts would force the other banks to do what they did in times of the sub-prime crisis, to lend money wholesale for the Northern Rock.

In order for the system to presumably operate the entire banks, these institutions must be obliged to insure each other. It is unlikely that banking institutions could insure with bodies external of the banking system since non-banks do not usually have the liquidity needed to give the resources needed in a banking run. If banking institutions pay each other insurance premia, then, unless some industries can be recognised as more expose to liquidity issues than others, the profit earned by each industry from giving insurance to other banks, might be expected more or less to suit what the bank pays for its own insurance. This is the outcome that liquidity insurance has become a mutual aid arrangement which is an agreement between banks to assist each other in financial aspects when the interbank market ahs continue to dry up.

It is noted that the arguments the management of Northern Rock were also triggered by the announcement of Bank of England in providing aids for the bank. It is noted that the market Abused Directive limits the Bank from giving aid disjointedly because the banking institutions was a publicly traded industry. With this there are separate rules to be considered and these include the Exchange Rules which requires Northern rock would require making public that they had received help. In this regard, one of the solutions for the Bank of England is to nationalise Northern Rock. The Northern rock nationalisation and the proposal for supporting other distressed banking institutions are said to be based upon the claims that such would safeguard the interests of employees and depositors. However, even this solution has challenge the bank since depositors have withdrawn their accounts.

2. Finally summarise Northern rocks strategic situation. Based upon your understanding, propose some recommendations for the Northern Rock board of directors to consider (with justifications for your choices).

Northern Rock faces issues and challenges which affects its performance in the market. The sub-prime crisis have affect the company and become critical and detrimental to the profit-generating prospects of the company especially during economic fluctuations in the regional as well as the local social, economic, and political situations of the locations where the branches of the bank are situated. As such currency rates, foreign exchanges, as well as the unexpected changes in the trends that characterize the volatile nature of the international market will post issues and problems that the management of the bank should address immediately.

The possibility that Northern Rock might not be able to meet its current and future payment obligations in full or in time, particularly in the business organization’s international deals, wherein the bank would need to settle its liabilities through refinancing when the company is at higher market rates or liquidating assets at a discount to the market risks, increases the company’s responsibility of handling risks.

Inconsistencies in the operation system of the company due to lapses in the communication structure and the ineffective and inefficient flow of relevant information for the immediate needs of the management to provide aggressive solution to the problems related to the organization’s operations, post as a hindrance to the development and growth of the bank. The fact that the bank is in the international business wherein operations are made complicated by the needs for preparation and other documentation processes to complete a transaction as well as to monitor the workflow and performances of the branches increases the risk of the Northern Rock.

Strategically implementing management measures to ensure that the interests of the bank is secured and the company’s need to conceptualize and design effective business plans are of primary consideration due to the complex structure of the organization and ever-changing economic environment of the international banking industry. Compliance with international business principles and regulations calls for necessary means of adapting the policies and laws within the company to complement with the outside provisions of the industry.

Careful allocation of the business organization’s resources should be realized in the company’s quest to achieve productivity and profitability amidst the competitive international banking industry. Identifying the priorities and immediate needs of the bank should be immediately recognized and laid out to facilitate and conduct necessary actions that will adhere to the goals of the company. Although the sub-prime issue is still ongoing, Northern rock should continue to think of possible ways to limit or totally eliminate the effects of this issue with their organisation. It can be concluded that the issue of sub-prime has affected the organisational performance of different banks in the global market. The inclusion of Northern Rock with this issue should be solved by the management without affecting how they perform in the British market.

All in all, it can be said that the Northern Rock crisis is just a part of a much huge crisis in the international financial system. This issue for the banking and financial markets as well as ordinary people is that nobody knows where the next break in the system will be. In addition, it can be said that if sub-prime issues would not be able to solve immediately, this would create extreme chaos for banking and financial institutions which would lead to various bankruptcies in the banking sector leading to turmoil in the international financial system.

Reference
Bank of England (2008). Online available http://www.bankofengland.co.uk/publications/news/2007/090.htm. Retrieve August 15, 2008.

Barr, A. (2007). Subprime woes infect commercial paper market: KKR Financial, Thornburg, Coventree among firms reporting disruptions. Online available http://www.marketwatch.com/news/story/subprime-mortgage-woes-infect-commercial/story.aspx?guid=%7B1989DE0D-9031-46A1-B3C5-8E07436CF37C%7D. Retrieve August 15, 2008.

BBC (2008). Northern Rock drops from FTSE 100. Online available http://news.bbc.co.uk/1/hi/business/7139241.stm. Retrieve August 15, 2008.

Bernanke, BS (2007). The Recent Financial Turmoil and its Economic and Policy Consequences, Online available http://www.federalreserve.gov/newsevents/speech/bernanke20071015a.htm Retrieve August 15, 2008.

Bernanke, BS (2007). The Subprime Mortgage Market., Online available http://www.federalreserve.gov/newsevents/speech/bernanke20070517a.htm Retrieve August 15, 2008.

Bernanke, BS (2008). Financial Markets, the Economic Outlook, and Monetary Policy, Online available http://www.federalreserve.gov/newsevents/speech/bernanke20070517a.htm Retrieve August 15, 2008.

Gross, D (2008). The Mark-to-Market Melee: Did an obscure accounting rule cause the credit crunch? Online available http://www.newsweek.com/id/130029. Retrieve August 15, 2008.

International Herald Tribune (2008). Crisis deepens for Northern Rock. Online available http://www.iht.com/articles/2007/09/17/asia/17northern.php. Retrieve August 15, 2008.

King, M. (2007), ‘Evidence to the Treasury Select Committee’, http://www.publications.parliament.uk/pa/cm200607/cmselect/ cmtreasy/uc999-i/uc99902.htm. Q90. Retrieve August 15, 2008.

Lahart, J (2008). Egg Cracks Differ In Housing, Finance Shells. Online available http://online.wsj.com/article/SB119845906460548071.html?mod=googlenews_wsj. Retrieve August 15, 2008.

Lim, M. (2008). Subprime mortgage meltdown: Roots of the crisis. Online available http://opinion.inquirer.net/inquireropinion/talkofthetown/view_article.php?article_id=101568. Retrieve August 15, 2008.

Moyers, B (2008). Online available http://www.pbs.org/moyers/journal/06292007/transcript5.html. Retrieve August 15, 2008.

MSNBC (2007). Will subprime mess ripple through economy? Q&A: Looking at the impact of the mortgage meltdown. Online available http://www.msnbc.msn.com/id/17584725 Retrieve August 15, 2008.

Unmack, N (2007). Rhinebridge Commercial Paper SIV May Not Repay Debt (Update1). Online available http://www.bloomberg.com/apps/news?pid=20601087&sid=aEacPeg9pmLg&refer=home. Retrieve August 15, 2008.

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