US Subprime MortgageMarket (C): Global Credit Crunch and Crisis at Northern Rock


Code : ECC0030

Year :

Industry : Banking, Insurance and Financial Services

Region : US

Teaching Note: Available

Structured Assignment : Available

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Profile of Northern Rock Northern Rock was founded in 1965 as Northern Rock Building Society – formed after merger of Northern Counties Permanent Building Society and Rock Building Society. Before it became a public limited company and a bank in October 1997, it was an amalgamation of 53 societies. Northern Rock has grown from a provincial building society in Newcastle into Britain's fifth biggest mortgage lender. In the late 1990s, it became the first UK lender to fully embrace mortgage securitisations – the process where pools of mortgages are packaged up as bonds and sold to investors in the wholesale market.

Northern Rock's Business Model Northern Rock operated by minimising its costs and ploughing the savings back into market-beating mortgage offers. As revenues grew faster than its cost base, it could offer better and better products. The bank kept costs down byminimising its network to 72 branches.8 A large proportion of its residential mortgage business is sourced indirectly, via independent financial advisers and the mortgage introducer market.9 All lending activities are carried out in UK, whereas funding, particularly non-retail, is sourced globally.

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US Liquidity Crunch and Rising LIBOR A higher interest rate environment in US led to a wave of foreclosures in the subprime mortgage segment. This caused heavy losses to lenders and lending is discouraged as investors have become wary of buying the mortgage debt.

Central Bank Intervention and Crisis at Northern Rock Northern Rock asked the Bank for a liquidity support facility, due to problems that it faced in raising funds in the money market. On September 14th 2007, in a statement by the Tripartite Regulation System (Exhibit IV) – Treasury, Bank of England and Financial Services Authority – the chancellor of the Exchequer authorised the Bank to provide a liquidity support facility to Northern Rock, against appropriate collateral and at an interest rate premium...

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