This document provides a case study analysis of the UK government's nationalization of Northern Rock bank during the 2007-2009 financial crisis. It first discusses the causes and impacts of the financial crisis. It then examines Northern Rock's specific vulnerabilities, including its high reliance on short-term funding and high leverage. The document evaluates the UK government's options to intervene, including liquidation, raising new capital, takeover, bailout, and nationalization. It argues that nationalization was the best solution, as it had fewer drawbacks than the alternatives and allowed the government to oversee the bank's operations and risk-taking. The document aims to assess whether nationalization is an effective policy tool for addressing banking crises.

1. Faculty 3, the Department of Economics I
Course: Bachelor of International Business
B27: Financial Markets, Institutions and Investment
Winter Semester 2010/11
The Back-door Nationalisation of Commercial Banks:
Is It a Good Solution? Case Study of Northern Rock plc
Written by: Juliane Krüger
Kristin Salzwedel
Hanna Tresselt
Berlin, 03.12.2010

2. CONTENT
EXECUTIVE SUMMARY ......................................................................................................... 3
1 Introduction ................................................................................................................................ 4
2 The recent financial crisis ......................................................................................................... 6
3 The UK government’s intervention in Northern Rock’s crisis .............................................. 8
3.1 Some background facts and status quo before the intervention............................ 9
3.2 Evaluation of intervention possibilities .............................................................. 11
4 Nationalisation ......................................................................................................................... 13
4.1 Disadvantages of nationalisation ........................................................................ 14
4.2 Advantages of nationalisation ............................................................................. 15
5 Conclusion ............................................................................................................................... 17
BIBLIOGRAPHY ...................................................................................................................... 20
ANNEX....................................................................................................................................... 26

3. EXECUTIVE SUMMARY
The recent financial crisis (2007-2009) clearly showed the limitations and drawbacks of
today’s financial sector and various depository institutions and highlighted the need of
restructuring them or redefining their roles. Interestingly, the word ‘nationalisation’ re-
appeared in world economic and political discussions with a number of governments taking
their key banks into public ownership. Thus, this paper aims at evaluating the effectiveness
and efficiency of the new strategic tool by comparing it to the other resolution possibilities
while it focuses on the actions taken by the British state to deal with Northern Rock plc.
The bank encountered problems mainly because of its balance sheet composition and high
leverage, which intensified its vulnerability to a decrease in the economy’s monetary base
and made the government intervention a necessity once the bank run began. The British
state had 5 options to solve the problem: the bank’s liquidation; rising new shareholder
capital; takeover by another financial institution; bail-out; and nationalisation. The paper
argues that the state control is the best possible solution because it has fewer drawbacks
compared to the other alternatives. Moreover, it has the best value in monetary terms,
presents an opportunity for reducing the ‘moral hazard’ problem and enables the state to
overlook the bank’s risk-taking practices and make sure that its fiduciary duty is fulfilled.
It is rather difficult to evaluate Northern Rock’s present performance compared to that
before nationalisation because of information asymmetry and because the bank has
recently been split into two parts. But data found in journals and online do suggest that
coordination between supervision and monetary control has turned out to be successful
and resulted in a profitable growth. However, the survey could be further enhanced by
evaluating an alternative of publicly managing commercial banks cost-effectively and
efficiently on a long-term basis rather than privatising them back as soon as possible.
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4. 1 Introduction
It goes without saying that the recent financial crisis has been the worst and the most
significant one since the Great Depression of the 1930s. It is noticeable not only for its
mere scope but also for its striking feature: immense liquidity problems within the
interbank market. As a matter of fact, some economists argue that the crisis of 2007-2009
defined the latest period in the development of modern financial markets as a result of
their immoderate deregulation since the 1970s – 1980s.1 In fact, many recent global crises
have shown a tendency of primarily affecting and immensely weakening the financial
sector of a country, highlighting the reality of today’s unstable and fragile financial
markets.2 In such unstable market situations, the state’s crucial task and the only option is
to intervene in order to protect the country’s economic system on a broader level.
It is interesting, therefore, to observe the following development: the word ‘nationalisation’,
which has been avoided for a long time, has now re-appeared in economic discussions and
has started to play an important role in the political discourse all over the world. Although
the mainstream viewpoint is still the same, namely that nationalisation in general, and that of
commercial banks in particular, should be avoided as an applied policy option whenever
possible, 3 there have been an immense number of concrete and effective back-door
nationalisation cases of key depository institutions all over the globe.
Thus, the focus of this research is on the legitimacy of back-door nationalisation of
commercial banks when they face financial difficulties as illustrated by the example of
1
See Crotty (2009), pp. 563-564.
2
See Cho (2010), pp. 5-6.
3
See Kitromilides (2010), p. 71.
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5. Northern Rock plc, an English bank, one of the first forerunners that indicated the existence
of failures connected with a new business model and modern financial market
developments. The paper examines the main actions taken by the British government and
dwells on the pluses and drawbacks of each one. Furthermore, it considers the option of
back-door nationalisation with the aim to answer the question of whether this is a good
solution and a new effective policy tool that helps to tackle liquidity and regulation problems
in the most efficient and effective way. To deal with the above-mentioned problems and to
answer the above-coined questions the paper draws on various pieces of scientific literature
such as books and journals as well as scholarly, newspaper and journal articles found online.
The first chapter introduces the background facts concerning the recent financial crisis
that underlined the necessity to re-think and re-evaluate all the existing policies when
tackling a global financial calamity. In the second chapter the main weaknesses of
Northern Rock’s business model are diagnosed and consequently the key financial
figures and structures are presented. It further proceeds with discussing and evaluating
the main possibilities the British government had at hand and took advantage of in order
to help the bank in its financial difficulties. The focus of the final chapter is on the
practical solution, namely nationalisation, which occurred in February 2008. This part
discusses the main disadvantages as well as perceived benefits of nationalisation and
tries to assess whether this was the best solution to the problem. Finally, some
conclusions are made and some possibilities for future research are appointed.
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6. 2 The recent financial crisis
In the past, various financial meltdowns took place in many countries all over the world
including Russia, Korea, Sweden, Great Britain, Japan and the United States. Though
each financial crisis featured own characteristics, they all showed similarities to one
another as they were generally caused by “factors such as an overshooting of markets,
excessive leveraging of debt, credit booms, miscalculations of risk, […] rapid outflows
of capital from a country, unsustainable macroeconomic policies, off-balance sheet
operations by banks or inexperience with new financial instruments”.4
The recent financial crisis that resulted into severe market instabilities is not an exception
to the rule. Although it was originated by various developments, a new financial
instrument, namely, securitisation of assets, particularly (subprime) mortgage debt, into
collateralised debt obligations as response to the boom in housing market in 2004-2006 is
one of the main reasons that caused it.5 The new tool enabled banks to convert loans into
sellable assets and off-load risky loans onto others as well as promised high profits to the
participants.6 Thus, many financial intermediaries had the urge to act without carefully
evaluating the credit risk. Initially, this system created huge profits until home values
deteriorated and mortgage defaults started, consequently bringing down mortgage-backed
securities. Hence, financial institutions that owned these risky assets were no longer able
to sell them to other investors and made enormous losses.7 With an increasing default risk,
incurred losses, existing information asymmetry and growing market instability there were
4
Nanto (2009), pp. 30-31.
5
See loc. cit., pp. 3-4.
6
See Shah (2008), http://www.globalissues.org/article/768/global-financial-crisis. Accessed 14.11.2010.
7
See Sinn (2010), pp. 35-37; Madura (2010), pp. 21-22.
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7. almost no investors ready to put in new resources in financial institutions and the flow of
funds in the financial markets shrank.8 Finally, the overall financial system destabilised,
which had unprecedented consequences around the world.
Although the recent financial crisis showed an incipient character already in the second
half of 2007, it became particularly vivid in 2008-2009. The world was confronted with
an economic recession that negatively affected various businesses, increased the rates of
unemployment and reduced the states’ revenues due to automatic stabilisers. 9 Stock
markets crashed to unforeseen low values globally, many banks made severe losses and
several large financial institutions went bust or were bought out. 10 Even banks that
seemed to be stable soon faced liquidity problems. Consequently, national states needed
to develop rescue packages and government guarantees in order to support their
economic systems and guard them against deteriorating even further.
In fact, central banks of several countries reduced interest rates in order to stimulate the
national economies. However, this turned out to be insufficient. Furthermore, it was clear
that various weaknesses and limitations showed by the financial system during the crisis
needed to be defined and corrected. Moreover, national governments wanted to control
both potential debts that financial intermediaries would continue to attract as well as their
future investments conducted with the fresh capital received from the state.11
Thus, nationalisation of banking industry institutions became a popular tool to do that. The
list of (part-) nationalisation cases of commercial banks during the recent financial crisis
8
See Madura (2010), pp. 21-22.
9
See Sinn (2010), pp. 16-18.
10
See Shah (2008), http://www.globalissues.org/article/768/global-financial-crisis. Accessed 14.11.2010.
11
See Cho (2010), pp. 15-17.
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8. ranges from Belgium and the Netherlands (Fortis) to Latvia (Parex Bank), from the USA
(Citigroup) to Iceland (Landsbanki, Glitnir, etc.), from Germany (Commerzbank) to the
UK (Northern Rock, Royal Bank of Scotland, etc.) and so on. 12 All these depository
institutions were nationalised by their governments mainly for one reason: to stop
deterioration and a possible collapse of a country’s financial system by preventing these
banks from ‘infecting’ other institutions. To evaluate the effectiveness of the new tool the
paper will focus on one particular case – Northern Rock, which probably became the first
and one of the most striking European high-profile victims of the recent financial crisis.
3 The UK government’s intervention in Northern Rock’s crisis
In the autumn of 2007 TV and newspaper audience all over the globe was astonished to
see the following images: unending lines of depositors in front of the local offices of one
of the UK banks. People were queuing for hours in order to withdraw their savings from
the UK-based depository institution called Northern Rock. 13 Thus, the aim of this
chapter is to scrutinise the developments that had led to the above-described situation in
order to understand the event itself and the need for the government intervention that
followed in 2007-2008. It further proceeds with presenting all intervention alternatives
in a comparative perspective evaluating advantages and disadvantages of each one.
12
See Sinn (2010), “Appendix: Chronology of the Financial Crisis”.
13
It is even more remarkable if one takes into account that the foregoing run on a bank in the UK
happened about one and a half centuries ago, namely in 1866 when the London bank Overend Gurney
defeated its own ends during the 1860s boom (see Shin (2009), p. 101).
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9. 3.1 Some background facts and status quo before the intervention
The origin of Northern Rock Building Society can be traced back to July 1965 when the
Northern Counties Permanent Building Society amalgamated with the Rock Building
Society. The newly established organisation further merged with more than fifty other
regional building societies before it went public in 1997. 14 Despite Northern Rock’s
comparatively insignificant roots, it had very ambitious goals. During the nine years that
preceded the crisis the bank’s total assets increased by ca. 552% 15, which correlates to a
steady annual expansion of approximately 23.2%. By June 2007, Northern Rock was
ranked the fifth-biggest UK bank in terms of its mortgage assets.16
For the purpose of sustaining such a rapid rise in the bank’s assets, the organisation had
to alter the system of its dept as well as the ratio of the former to the latter. These
arguably turned out to be the main reasons why Northern Rock faced liquidity problems
in 2007. Although there are many causes that contributed to the difficulties experienced
by the bank, one might argue that the composition of its balance sheet and the related
high leverage were the ones that led to a considerable cash outflow in 2007 (see
Appendix 1) and a consequent disaster. To prove the legitimacy of this argument the
following should be taken into account.
First of all, Northern Rock heavily relied on the non-retail sector for its resources and mainly
dealt with mortgages and loans, which constituted ca. 77% of the bank’s total assets.17
Parallel to this considerable ratio of mortgage funds, the bank gradually reduced its
14
See Rafferty (2008), p. 3.
15
From £17.4 billion in 1998 to £113.5 billion in June 2007 (see Shin (2009), p. 103).
16
See loc. cit., pp. 103-104.
17
See Ndong / Scialom (2008), p. 2.
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10. percentage of household deposits. The latter decreased approximately threefold from ca. 60
in 1997 to about 21 percent in 2007. 18 This mismatch between the sums provided for
borrowers and the amounts brought in by savers was compensated by different types of
nonretail financing facilities, for example, comparatively illiquid covered bonds and
securitised notes as well as liquid interbank deposits (see Appendix 2). The organisation’s
business model of lending on a long-term basis and borrowing short led to the fact that
Northern Rock had to constantly roll over its debt19 and was very vulnerable to liquidity
problems in the money market. Indeed, the bank experienced immediate difficulties when
the money market started to stagnate in 2007 as a result of the beginning financial crisis.20
Secondly, Northern Rock had a very high degree of leverage. Leverage is defined as
“the amount of debt used to finance a firm’s assets”21 or “the ratio of total assets to
equity” 22 . From the very beginning of its public existence, Northern Rock observed
continuous growth in its leverage. In fact, the bank’s common equity gearing was pretty
high in June 2007, standing at 58.2%. It soared even higher to 86.5% by December 2007
due to capital losses 23 (see Appendix 3). This feature further intensified the bank’s
vulnerability to a decrease in the monetary base of the overall financial system and made
the government intervention a necessity once the bank run began.
18
See Cociuba (2009), http://www.dallasfed.org/research/eclett/2009/el0903.html. Accessed 08.11.2010.
19
This was not always properly done. For example, in December 2005 the bank had plenty of outstanding
securitized notes. In fact, they accounted for £31.1 billion. It only managed to withdraw about 23% of the
whole sum (namely £7.12 billion) during the following year (see Shin (2009), pp. 107-108).
20
See loc. cit., pp. 104-107.
21
Investopedia.com (2010), http://www.investopedia.com/terms/l/leverage.asp. Accessed 07.11.2010.
22
Cociuba (2009), http://www.dallasfed.org/research/eclett/2009/el0903.html. Accessed 08.11.2010.
23
Compare: even US investment banks usually have leverage of 25-30 percent (see loc. cit.).
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11. 3.2 Evaluation of intervention possibilities
The UK government had five options for solving the difficulties faced by Northern
Rock. These were: the bank’s liquidation; rising new shareholder capital; takeover by
another financial institution; bail-out; and, finally, nationalisation. Interestingly enough
the British government tried out each alternative in turn apart from the first one.
There is a particular difficulty in liquidating a faulty commercial bank, especially when it
has high financial value as Northern Rock did. Financial intermediaries in general and
commercial banks in particular perform a crucial role of connecting surplus and deficit
units and advancing the flow of funds from the former to the latter. 24 That is why their
role of ‘oiling the economy’ and keeping its motor going is crucial in every single market
and cannot be easily ignored. Moreover, banks and other financial intermediaries are so
closely interrelated that a failure in one link might break the whole chain, i.e. the entire
national system might destabilise or collapse.25 This means that failing a bank is not the
best solution and is only appropriate for small and insignificant financial institutions.
Consequently, this alternative was out of question in the case of Northern Rock.
Seeing the danger of seizing economy most national governments will rarely apply the
previous tool in reality. They would rather advise a bank to attract new shareholder
capital or facilitate its takeover by another depository institution. The arguments in
favour of these alternatives are that a suffering bank will be saved and will stay in the
private sector of economy. The mainstream perceives this as a better option because the
private sector is viewed as being more innovative, entrepreneurial, and more effectively
24
See Madura (2010), p. 461.
25
See Lyons (2009), pp. 4-5.
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12. and efficiently meeting rapid market challenges than the public one. 26 The main
disadvantage of the options is that they are mostly available in prospering economic
situations. Moreover, a takeover might lead to monopolistic tendencies in the financial
sphere. In practice, Northern Rock did its best to raise new shareholder capital.
Furthermore, the Financial Services Authority and the Bank of England tried to facilitate
an acquisition by a different commercial bank. Nevertheless, the both actions brought
about no results mostly because of the spreading financial crisis but also due to the
hesitation of the UK financial authorities to invest public money into the matter.27
The next decision tried out by the British government was to provide the state’s
guarantee and a bailout. The latter presupposed the money injection into the failing
bank. Bailout, however, is a very controversial issue, resembling “trying to put out a fire
by pouring gasoline on it”28. Firstly, misjudgement of the necessary monetary amount
could ultimately worsen the whole situation by triggering high inflation. Secondly,
giving banks money whenever they find themselves in crises contains the danger of
‘moral hazard’. Indeed, in most industries the threat of insolvency and collapse controls
reckless conduct and unnecessary risk-taking by individuals. Commercial banks,
however, are aware that a bankruptcy of one institution might bring the whole system
down and totally rely on receiving the state funds in problematic situations. This
understanding may promote their unnecessary risk-taking. 29 Finally, there is a rather
lose-lose situation for taxpayers: on the one hand, the government uses tax revenues to
cover the losses of a defective bank, on the other hand, when the same bank makes a
26
See Kitromilides (2010), p. 71.
27
See Shin (2009), p. 102.
28
Biggs (2009), www.newsweek.com/id/186976. Accessed 16.11.2010.
29
See Kitromilides (2010), p. 72.
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13. profit later on, the money is redistributed within the institution, and the taxpayers are left
out. Hence, it is not surprising that the UK government was rather reluctant in providing
the bailout money. And even when they were ready to invest the required sum, it was
not enough to solve Northern Rock’s problems. Thus, the only left alternative for the
British government was to nationalise the faulty bank.
4 Nationalisation
The British government nationalised Northern Rock on the 22nd of February 2008. 30
Nationalisation is defined as the act of transferring ownership in distinct segments of
economy from private branches of business to the country’s public area.31 Consequently,
the government’s nationalisation of Northern Rock presupposed that the state guaranteed
support by providing the necessary monetary base and re-arranging control and
supervision regulations. This arguably ensured that the trust in the national fiscal system
did not decrease further and started to recover with commercial banks increasing their
lending to each other and being able to maintain their daily activities.32 While considering
positive externalities of nationalisation, it is still worth evaluating its advantages against its
disadvantages. Thus, this chapter will scrutinise the main benefits and drawbacks of
nationalisation in general and the ones vivid in Northern Rock’s case in particular.
30
See BBC (2009), http://news.bbc.co.uk/2/hi/in_depth/business/2008/northern_rock/default.stm.
Accessed 16.11.2010.
31
See Longman Dictionary of Contemporary English (1995).
32
See Foley (2008), http://www.independent.co.uk/news/business/news/wall-street-humiliated-by-
nationalisation-of-banks-961397.html. Accessed 16.11.2010.
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14. 4.1 Disadvantages of nationalisation
The mainstream viewpoint is that nationalisation in general and that of commercial
banks in particular should be avoided. The negative attitude is rooted in several common
academic and practical opinions, namely, that the public sector is very red-tape and
time-consuming as well as governed by bureaucracy and excessive political limitations.
These features disable a publicly owned institution to promptly meet market challenges
and opportunities, which results into its inefficiency. Furthermore, competition between
employees and, therefore, most of their motivation might dry up. If one takes into
account that exactly these surroundings of competitive environment cause efficiency and
profitability in the banking sector, it becomes clear why nationalisation can result in
negative effects on the overall profit and economic proliferation.33
A further weakness of nationalisation is a potential authority misuse by the government
when it has a commercial bank in its ownership. The situation of power may enable the
state to redefine the banking system to their own advantage in order to improve their
political well-being and stability. This might lead to corruption and fraud within the
financial sector and will have a negative effect on the overall economy.
Moreover, nationalisation presupposes that the state invests huge sums of public money
into the financial system, which might expand their debt and negatively affect the value
and the exchange rates of the country’s currency. 34 In summary, time-consuming
bureaucracy, inefficiency, low motivation, potential misuse of authority as well as the
33
This is considered to be general knowledge.
34
See Free Online Articles Directory (2009), http://www.articlesbase.com/banking-articles/disadvantages-
of-bank-nationalizaton-811339.html. Accessed 25.10.2010.
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15. country’s debt expansion and the depreciation of the domestic currency are the main
arguments against nationalisation of commercial banks.
As a matter of fact, the nationalisation of Northern Rock also brought about some negative
developments. For instance, the UK government lacked the internal knowledge and
expertise in the matter of running a financial institution and gave a go-ahead to Northern
Rock’s original business plan in the spring of 2008 without properly assessing it.
Unfortunately, the plan turned out to be too optimistic and incurred more losses than it
was expected.35 Furthermore, the government’s investment of about £100 billion into the
bank expanded the British Debt from 38 percent to approximately 45 percent of the
country’s Gross Domestic Product.36 Moreover, the British currency did fall down after
the government took Northern Rock into the public ownership37 (see Appendix 4).
4.2 Advantages of nationalisation
Although unfavourable attitudes concerning nationalisation do exist and some negative
developments were triggered by the nationalisation of Northern Rock, it is worth
considering advantages of the tool before a conclusion can be drawn. Hence, the following
sub-chapter will provide a short overview of the main benefits of state ownership.
Firstly, nationalisation presents an opportunity for reducing the ‘moral hazard’ problem.
By creating an inside system that is able to regulate and supervise the government can
35
See House of Commons: Committee of Public Accounts (2009), p. 14.
36
See Porter / Conway (2008),
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/2784076/Nation-hit-with-100bn-
Northern-Rock-debts.html. Accessed 17.11.2010.
37
See Free Online Articles Directory (2009), http://www.articlesbase.com/banking-articles/disadvantages-
of-bank-nationalizaton-811339.html. Accessed 25.10.2010.
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16. recognise, discourage or limit unnecessary risk-taking before it is too late and the
consequences are too acute. Although nationalised depository institutions can also abuse
risk-taking practices and lead to a system failure, the state can arguably stop such acts
more successfully and at an earlier stage than any other existing regulation system.38
Secondly, the recent financial crisis was brought about by sheer greed and competitiveness
within the banking sector. If one takes into account that the present system is the one
where financial institutions can mismanage billions of pounds saved by retailers,
nationalisation is a justifiable tool.39 In fact, the government has more means to make sure
that fiduciary duty overweighs profit-seeking tendencies within the financial sector and
can force depository institutions to lend in the best interest of the people who enable the
mere existence of these commercial banks by depositing their savings.
Finally, all other alternatives of state intervention discussed above lose in comparison with
nationalisation as they arguably have many more drawbacks than the state control itself.
Hence, it is very difficult not to agree with the Committee of Public Accounts of the House
of Commons that stated in The Nationalisation of Northern Rock report: “The Treasury’s
decision to nationalise Northern Rock in February 2008 was based on a comprehensive
assessment of the options available to it. This analysis suggested that public ownership
represented the best alternative in terms of value for money”.40 Moreover, nationalisation is
sometimes the only available opportunity to save the failing banking system in crises.41
Indeed, this argument can be validated by Northern Rock’s case as this option was the only
38
See Kitromilides (2010), pp. 72-73.
39
See Business spotlight (2008), http://www.business-spotlight.de/news/head-to-head/should-the-
government-nationalize-all-banks. Accessed 18.10.2010.
40
House of Commons: Committee of Public Accounts (2009), p.5.
41
See the Telegraph (2008), http://www.telegraph.co.uk/comment/telegraph-
view/3562752/Nationalisation-of-banks-should-be-strictly-temporary.html. Accessed 16.11.2010.
~ 16 ~

17. one left for the British government to bring the faulty bank back into the system as all other
means had already been unsuccessfully applied before.
5 Conclusion
Any government’s principal task during phases of financial suffering is to maintain the
stability of the national economic infrastructure, which has to cover diverse segments of
its fiscal system. The executive’s job is to address weaknesses and limitations of various
links and to assist in restructuring them or redefining their roles. One of the most
efficient and effective tools in terms of this is arguably back-door nationalisation.
Though this tool is often rejected as a resolution strategy, various cases in numerous
countries show that state intervention on a broad scale in times of crises can be very
successful both for a company or institution (as it is able to regain its economic strength
and will be rescued from insolvency) as well as for most of its employees and customers
(although the effect on investors might differ from case to case).
This paper has discussed the role of the government intervention in a commercial sector in
crisis situations by focusing mainly on the actions taken by the UK government in
connection with Northern Rock. As one can see from the above scrutiny, the British state
had five alternatives for solving the difficulties faced by the bank, but only nationalisation
turned out to be an applicable, most effective and efficient one in terms of money.
However, one should not overestimate the success of the decision: some negative
developments were indeed brought about by the government’s action and there were
some mistakes made at the beginning due to the lack of knowledge and expertise inside
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18. the cabinet. Moreover, the UK government arguably waited for longer than desired
before nationalising the bank. They preferred to try out all other options first and to see
the entire scope of the crisis rather than acting promptly and letting the bank continue its
regular operations earlier and with less losses.
Nevertheless, the comparative analysis presented above proves that a back-door
nationalisation of the commercial bank was the best solution at hand as other options would
have either done more harm or would have not solved the root of the problem. Northern
Rock is a vivid example that publicly-run commercial institutions are perceived as more
sound, trustworthy and stable than privately-owned ones because they are legally protected,
controlled and supervised by the government. Indeed, after Northern Rock’s nationalisation
customers’ confidence in the bank’s safety and reliability grew and more retailers wanted to
have accounts with it.42 Still this increase in trust should not be taken for granted and the UK
government has to build up more internal expertise and know-how in order to run the bank
effectively meeting the challenges and opportunities of the globalising financial market.
It is rather difficult to evaluate the success of Northern Rock’s today’s performance
compared to the times before nationalisation, partly because of information asymmetry but
also because the bank has recently been split into two parts: Northern Rock plc and Northern
Rock (Asset Management) plc – in order to better safeguard the future operations. 43
However, according to the company’s announcements and experts’ evaluations the both
parts keep on gradually developing and improving their performance and growth.44 The ‘bad
42
See Absolute Astronomy, http://www.absoluteastronomy.com/topics/Northern_Rock. Accessed
02.12.2010.
43
See loc. cit..
44
See BBC (2010), http://www.bbc.co.uk/news/business-10848374. Accessed 28.11.2010.
~ 18 ~

19. bank’ even reported a return to profit in the previous half-year. 45 This suggests that
coordination between supervision and monetary control in the process of nationalisation
turned out to be successful and has resulted in a profitable growth.
Nevertheless, seeing the public’s negative attitude towards nationalisation, governments all
over the world rather opt for taking a failing institution into temporary public ownership and
privatising it back as soon as possible. Indeed, the UK government hopes to re-privatise the
two parts of Northern Rock in the upcoming years and to at least get repaid outstanding
loans.46 However, the main disadvantage of such an approach is that it enables commercial
institutions, once privatised, to fall back into the old patterns of extremely risk-taking and
profit-making practices, which might trigger new financial crises in no time.47
In fact, there exists another possibility, namely, to consider a more drastic modification
of a commercial sector where bank nationalisation will be a more permanent and long-
term characteristic. As can be seen in several countries in the world, such a policy can be
successful and can benefit both the state and the public. Although this research question
is beyond the scope of this paper, an attractive possibility for a future scrutiny will be to
evaluate an alternative of commercial depository institutions being managed cost-
effectively and efficiently within the framework of long-term government ownership.
45
“Pre-tax profit came in at £349.7m for the first six months of the year” (loc. cit.).
46
See loc. cit..
47
See Business spotlight (2008), http://www.business-spotlight.de/news/head-to-head/should-the-
government-nationalize-all-banks. Accessed 16.11.2010.
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20. BIBLIOGRAPHY
Books
1. House of Commons: Committee of Public Accounts (2009), The Nationalisation
of Northern Rock (thirty-first report of session 2008-09, report, together with
formal minutes, oral and written evidence). The Stationery Office: GB. – 33 pp.
2. Longman Dictionary of Contemporary English, 3rd Edition (1995). Longman
Dictionaries: Spain. – 1668 pp.
3. Madura, J. (2010), Financial Institutions and Markets, 9th International Edition.
Cengage South-Western: Australia, etc. – 250 pp.
4. Sinn H.-W. (2010), Casino Capitalism: How the Financial Crisis Came about
and What Needs to Be Done Now. Oxford University Press: GB. – 304 pp.
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25. Videos
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26. ANNEX
Appendix 1: Consolidated Cash Flow Statement for the year ended 31 December 2007
Source: Northern Rock plc, Annual Report and Accounts 2007 [Online]. Available at:
http://companyinfo.northernrock.co.uk/downloads/2007_annual_report.pdf. Accessed
02.12.2010.
~ 26 ~

27. Appendix 2: The bank’s balance sheet and liability structure, June 1998-June 2007
Source: Bank of England (2007), Financial Stability Report, Issue 22 [Online], October
25. Available at http://www.bankofengland.co.uk/publications/fsr/2007/index.htm.
Accessed 07.11.2010.
~ 27 ~

28. Appendix 3: Leverage of Northern Rock from June 1998 to December 2007
Source: Cociuba, S. E. (2009), “Seeking Stability: What’s next for banking
regulation?”, in: Economic Letter – Insights from the Federal Reserve Bank of Dallas
[Online], Volume 4, No. 3, April 2009. Available at
http://www.dallasfed.org/research/eclett/2009/el0903.html. Accessed 20.11.2010.
~ 28 ~

29. Appendix 4: GBP/EUR (GBPEUR=X)
Source: YahooFinance.com (2010), “GBP/EUR (GBPEUR=X)” [Online], 22 November.
Available at: http://de.finance.yahoo.com/q/bc?s=GBPEUR=X&t=5y&l=on&z=l&q=l&c=.
Accessed 24.11.2010.
~ 29 ~