Northern Rock Case Study 1


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Financial Crisis

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Northern Rock Case Study 1

  1. 1. Presented by: Miryana Marina Clarisa Fouz Imtiaz Azhar Syed Femi
  2. 2. Introduction <ul><ul><li>There are a lot of factors which led Northern Rock into the crisis. We will consider this from different aspects ; </li></ul></ul><ul><ul><li>History </li></ul></ul><ul><ul><li>Laws </li></ul></ul><ul><ul><li>Current scenario </li></ul></ul><ul><ul><li>Future recommendations </li></ul></ul>
  3. 4. Objectives <ul><li>To analyze and evaluate the situation of Northern Rock problems from different perspectives. </li></ul><ul><li>Key players involved in the crisis. </li></ul><ul><li>Role of Financial Services Authority (FSA) </li></ul><ul><li>Role Bank of England </li></ul>
  4. 5. Key Players responsible for crisis <ul><li>Executive Directors </li></ul><ul><li>Non-Executive Directors </li></ul><ul><li>Audit, Nominations, Remuneration & Risk committees </li></ul><ul><li>External and Internal auditors and lawyers </li></ul><ul><li>Financial analysts, credit rating agencies </li></ul><ul><li>Media </li></ul><ul><li>Financial Services Authority (FSA) </li></ul><ul><li>Bank of England </li></ul><ul><li>Politicians and government </li></ul>
  5. 6. The Role of FSA <ul><li>FSA ignored the Qualification of Directors </li></ul><ul><li>FSA Fails to utilize its powers to stop Northern Rock from risky landings Under section 45 of (Financial Services and Markets Act 2000) </li></ul><ul><li>The weaknesses in Northern Rock’s business model were ignored by FSA </li></ul>
  6. 7. <ul><li>FSA failed to give complete attention to stress testing conducted by Northern Rock </li></ul><ul><li>FSA allowed Northern Rock to weaken its balance sheet during Financial crises (Article 45) </li></ul>
  7. 8. Bank of England <ul><li>Banker’s bank </li></ul><ul><li>Debt Manager </li></ul><ul><li>Policy maker </li></ul><ul><li> (Monetary & Fiscal) </li></ul><ul><li>Lender of the last resort </li></ul>
  8. 9. Role of The Bank of England <ul><li>Financial Stability Role: </li></ul><ul><ul><li>People need confidence on system </li></ul></ul><ul><ul><li>Draw attestation to potential vulnerabilities </li></ul></ul><ul><ul><li>Reduction of risks </li></ul></ul><ul><li>Supervisory Role: </li></ul><ul><ul><li>Financial Service and Markets Act 2000 </li></ul></ul><ul><ul><li>Ceased to exercise its functions as supervisor of banks </li></ul></ul><ul><ul><li>(Article 10 Banking Reforms Seventeenth Session 2007 - 08) </li></ul></ul><ul><li>Differences of opinion among the tripartite authorities (Article 26 of Banking Reform Seventeenth session 2007 - 08) </li></ul>
  9. 10. The Role of Bank of England <ul><li>Bank of England did not inject cash during liquidity crisis because of lack of confidence among banks (Article 10 treasury report) </li></ul><ul><li>Later they injected cash with higher interest rate </li></ul>
  10. 11. <ul><li>Failure of Bank of England to protect banks against moral hazard (Article 10 of House of Commons) </li></ul><ul><li>Lack of Interest by Bank of England </li></ul>
  11. 12. Northern Rock Financial performance over the years
  12. 13. NR Liability Structure
  13. 16. NR Borrowings
  14. 17. NR Directors Remuneration £ 000
  15. 18. Recommendations <ul><li>FSA should focus more on prudential supervision, including liquidity and stress testing </li></ul><ul><li>Increase number of supervisory staff engaged with high impact firms and the creation of a new group of supervisory specialists </li></ul><ul><li>FSA and Bank of England need to strengthen their resources of data and improve their quality </li></ul><ul><li>( House of Commons Treasure Committee, Banking Reform Seventeenth Report) </li></ul>
  16. 19. <ul><li>FSA to improve quality and resourcing of their financial analysis </li></ul><ul><li>Raised emphasis on assessing the competence of firms’ senior management </li></ul><ul><li>Bank of England improvement on liquidity management trough correct Monetary policy </li></ul><ul><li>Bank of England should establish a Financial Stability Committee </li></ul><ul><li>(House of Commons Treasure Committee, Banking Reform Seventeenth Report) </li></ul>
  17. 20. <ul><li>FSA and Bank of England have been acting very inadequate in their regulating and supervision roles. Some changes in their practice are necessary to be made. Following some recommendations will prevent Special Resolution Regime to came into act. </li></ul>
  18. 21. <ul><li>Thank you for your attention! </li></ul>