In spite of the television images of long lines of depositors outside its branch offices, the run on northern rock was unlike the textbook retail depositor run caused by coordination failure. The author, robert tricker is the man who coined the phrase corporate governance in the early 1980s, so his credentials as an expert on the topic are undeniable. This paper discusses the corporate governance failures that can. Jun, 2009 poor corporate governance and defective legal regulation were amongst the key causes of the failure of the ftse top 100 uk company, northern rock plc. The uk relied wholly on its standard corporate insolvency regime to. A new book by the mails city editor tells for the first time the.
Sep 16, 2007 the upstart from the north east thought its wheeze of securitisation backed by a lean machine with great it was a licence to print money. Northern rock announces biggerthanexpected losses of. During the early 2000s the company borrowed substantially to fund mortgages. This book is his inside story of the rise of northern rock, becoming one of the most respected and envied financial institutions in the uk, and its subsequent spectacular collapse. There are many lessons from any corporate failure, but the best ones are not generally those identified by politicians and the media. By any yardstick, the tripartite regime was a dismal failure. Corporate governance is a very sophisticated and flexible concept which addresses fundamental organisational purposes for every type of organisation from small businesses to the largest multinational conglomerate together with the most serious challenges arising from the globalisation of corporate and organisational structures and the.
This document known by the colour of its cover as the purple book. The failure of lehman brothers, ubs, barclays, northern rock nr, royal. Northern rock shareholders must be compensated when northern rock failed, thousands of people, many of them small shareholders, lost their savings and their fight continues. How to succeed at failure business trends and insights. This paper looks closely at the factors that contributed to the failure of the british bank, northern rock plc. Northern rock plc is predominantly funded by retail deposits, which represented 93% of total funding at 31 december 2011. The northern rock crisis in the uk david g mayes and geoffrey wood fallout from the credit squeeze and northern rock crises. Lessons from the demise of the uks northern rock and the u. It was a failure of the regulator not to see systemic risk. After months of hard work, virgin money had put together what we considered to be a strong consortium in order to buy the bank and refinance its debts. Heavily blamed for excessive lending before the financial crisis, applegarth could actually advise apollo on buying up northern rocks distressed loan book. There are many lessons from any corporate failure, but the best ones are not generally those identified by. Nrs business predominantly comprised of residential mortgage loans. Corporate governance failure and impact on financial.
Some of the most memorable images of 2007 if not of the. Of course, since northern rock failed the world has experienced what is arguably its most serious financial crisis ever and in the us much larger and more significant banks have failed. Of course, since northern rock failed the world has experienced what is arguably its most serious financial. Northern rock was split into a good bank and a bad bank, with the rock retaining the safer parts of its mortgage book and the more risky elements going to the governmentcontrolled uk. In august 2007 the united kingdom experienced its first bank run in over 140 years.
Depositors were expected to take comfort from a depositor compensation scheme based on the principle of coinsurance. Understanding the causes of corporate failure corporate failure is normally a reflection of deepseated corporate shortcomings, according to a report by the cass business school in london and published by airmic, the risk management association. Yet both northern rock and the fsa assert that the event that felled the bankthe complete failure of the various marketbased funding sources upon which it had become reliantcould not have. Arthur andersen, bp, northern rock, railtrack, societe generale, maclaren, eads, independent. The failure of the northern rock in the uk the first uk bank to experience a run in nearly a 140 years pointed to securitisation as the reason for its collapse and thus the reason why other banks failed, and, thus also, to the cause of the global financial crisis. Written in clear and concise prose, greed and corporate failure illuminates the root causes of the problems faced by corporations on both sides of the atlantic. Dec 12, 2007 conservative leader david cameron yesterday said nationalising northern rock it would be a monumental failure by the government. Although the deal means that the british government are to lose hundreds of millions on the deal, they claim that this represented the best deal for the taxpayer. Based at regent centre in newcastle upon tyne, united kingdom, northern rock was originally a building society. Sep 12, 2017 northern rock s demise it was split into bad and good sets of assets and operations, with virgin money buying the latter was a shock to the regions economy, as was the banking crisis that.
Poor corporate governance and defective legal regulation were amongst the key causes of the failure of the ftse top 100 uk company, northern rock plc. Pdf the failure of corporate governance and the limits of law. Jan 21, 20 the failure of northern rock bank in late 2007 was sudden, unexpected and, as a result of the unprecedented run on the bank, was spectacular. Jan 26, 2008 northern rock had only one well from which to drink, and the fsa should have realised that, he said. Yes bank scam a case of corporate governance failure. Northern rock how the bank given the codename elvis changed the country it was a model built for good times, for a confident economy, but it fell into difficulty as soon as the financial. When northern rock had been underreporting its mortgage arrears, on investigation there was nothing in writing confirming that senior management knew about it. The cause of the failure of the northern rock is easily determined. Sep 14, 2017 david baker, former northern rock deputy chief executive, and david jones, exfinance director, were banned by the financial services authority in 2010 from working in the city of london for. Northern rock had only one well from which to drink, and the fsa should have realised that, he. More than 2,000 jobs at northern rock are to go, the company confirms. During the early 2000s the company borrowed substantially to fund. Committee chairman john mcfall said northern rocks directors were primarily to blame, but added that financial stability safeguards failed abysmally. Prior to 2008 it was profiting from money deals it was doing with america, however many of the investors pulled out, due to banks offering mortgages to people with no income and no jobs ninja mortgages.
Of course, since northern rock failed the world has experienced what is arguably its most serious financial crisis ever and in the us much larger and more. Oct 08, 2017 when northern rock had been underreporting its mortgage arrears, on investigation there was nothing in writing confirming that senior management knew about it. In the case of northern rock, the bank says it is lending to an institution facing temporary liquidity problems because the failure of such a bank would lead to serious economic damage. Northern rock however, issues which subsequently emerged at uk bank northern rock highlighted that anglos funding was not sufficiently wide, deep or stable to underpin the loan book. At last, a book that analyses the corporate failures of recent years and draws general conclusions. Northern rock nr, a middlesized uk bank of uk faced a run on its deposits.
Northern rock shareholders renew compensation campaign. Northern rock lessons of the fall briefing the economist. David baker, former northern rock deputy chief executive, and david jones, exfinance director, were banned by the financial services authority in 2010 from working in the city of london for. Corporate rescue, governance and risk taking northern rock. When the run on the northern rock took place in 2007, it was the first run on a uk bank in 140 years, a significant event.
Northern rockthe oversight of northern rock in public ownership part 3. Northern rock the group that thinks together, sinks together. Disgraced northern rock boss adam applegarth lands us private. In fact, ten years earlier it had converted from a mutual building society whose activities were limited by. Oct 01, 2009 heavily blamed for excessive lending before the financial crisis, applegarth could actually advise apollo on buying up northern rocks distressed loan book graeme wearden thu 1 oct 2009 06. The mortgage book of higher risk assets was renamed northern rock asset. Northern rocks demise it was split into bad and good sets of assets and operations, with virgin money buying the latter was a shock to the regions economy, as.
Jon wood, a fund manager who was a big northern rock shareholder and has been severely critical of the bank of englands action, is also thought be to considering fresh legal action. The upstart from the north east thought its wheeze of securitisation backed by a lean machine with great it was a licence to print money. This happened with the uk bank northern rock plc, and was. It said around a third of its 6,500 jobs will be cut by 2011, with most staff leaving in the first year. Northern rock shareholders must be compensated business. Mar 26, 2008 more than 2,000 jobs at northern rock are to go, the company confirms.
Northern rock was the first real test that the uk regulatory bodies had faced since the secondary banking crisis of 1973. The disposal of former northern rock mortgages and loans in 2015 was the governments largest ever financial asset sale. Sep, 2017 northern rock was split into a good bank and a bad bank, with the rock retaining the safer parts of its mortgage book and the more risky elements going to the governmentcontrolled uk. Conservative leader david cameron yesterday said nationalising northern rock it would be a monumental failure by the government. The failure of corporate governance is primary blamed for the largescale failures in 2002 such as arther anderson, enron and worldcom norwani et al. With candour, precise logic, and uncommon pragmatism, the authors give the reader a practical set of recommendations to prevent their recurrence. When judged against the governments objective to shrink the balance sheet swiftly the deal was value for money. Retail deposits were 18% higher than mortgage balances at 31 december 2011, giving a loans to deposits ratio of 84%. Northern rock, formerly the northern rock building society, was a british bank. Incentives, transparency and implications for the role of market discipline paul hamalainen. The search for a solution to northern rocks woes began after a run on the bank last september. The failure of northern rock bank in late 2007 was sudden, unexpected and, as a result of the unprecedented run on the bank, was spectacular. An inquiry concluded that the board had failed to properly protect the bank from the.
A banking crisis highlights the failure of bank corporate governance with dramatic effect. Northern rock was indeed a failure of its own board, it was also a failure of the. We learn that accounting irregularities are often a result of, not the root cause of, failure which usually stems from corporate cultural weakness. Corporate governance failure in financial services and uk.
Pdf the failure of northern rock a multidimensional case study. Prime minister gordon browns government thought otherwise and nationalized the bank. Funding problems at northern rock, the countrys fifthlargest mortgage lender, triggered the first run on a british bank in more than a century. An example of a bank being taken into state ownership due to its inability to manage liquidity risk was northern rock. The deal with virgin included jobs for 2,100 employees, around a million of northern rocks customers, 75 branches and around a. The mediumterm outlook for the company is very positive, said chief executive adam applegarth, announcing a 30 per cent increase in the interim dividend.
The failure of northern rock a multidimensional case study. Northern rock, bank failure, bank run, deposit insurance, lender of last resort up to september of 2007, the authorities in the uk, and most private sector observers there, thought that the idea of a bank run on a solvent bank, with pictures of distressed depositors queuing. But the genesis of the crisis can be traced back to the beginning of the subprime fiasco in the us. Northern rock exposed regulatory failings financial times. The run on northern rock was triggered by a media leak, allegedly from the tripartite regime, and the reaction of. Sep 14, 2017 northern rock shareholders must be compensated when northern rock failed, thousands of people, many of them small shareholders, lost their savings and their fight continues. Anglos failure to enforce loan policy a serious mistake.
For this reason, the examining of the failure of the northern rock becomes important. The book is a must have for governance practitioners and students alike. The failure of northern rock in 2007 and later, of rbs and lloyds exposed brutally that the uk lacked the tools needed to manage the failure of a bank. The man who crocked northern rock and how the scandal will cost. Corporate rescue, governance and risk taking northern. Sep 14, 2007 in the case of northern rock, the bank says it is lending to an institution facing temporary liquidity problems because the failure of such a bank would lead to serious economic damage. After months of uncertainty, the stricken bank has been nationalised, while the debate over who was to blame continues. Sep 28, 2019 the following february, northern rock, which had depended on money markets for its financing, collapsed and was nationalised by the government, and the great financial crisis duly followed. Northern rock how the bank given the codename elvis. Northern rock had a formal approach to risk management covering liquidity, credit, operational and market risk that it described fully in its filings for the us studynotes the examiner for paper p3 examines the crisis at northern rock and considers whether it was caused by a failure of risk management. The directors of northern rock acknowledged to the parliamentary committee of. Consider our muchpublicized attempt to buy the failing british bank northern rock in 2009. Bank failures and accounting during the financial crisis of 2008. Aug 05, 2008 funding problems at northern rock, the countrys fifthlargest mortgage lender, triggered the first run on a british bank in more than a century.
In the following contribution, eisenbeis and kaufman give a powerful perspective from the united states by comparing the failure of northern rock with that of countrywide and indymac in the us. Disgraced northern rock boss adam applegarth lands us. The following february, northern rock, which had depended on money markets for its financing, collapsed and was nationalised by the government, and the great financial crisis duly followed. The technical reason for the collapse was a lack of liquidity caused by a flight to quality in the international money markets. The book tells of his personal experiences at northern rock before, during and after the crisis, and comments on the events that unfolded around him and what impact. The causes of failure of hypo bank, fortis bank, kaupthing and northern rock are analysed. When northern rock reported halfyear results in july 2007, it was able to boast that firsthalf net lending was.
About the author brian walters has worked in the banking industry for 36 years, having started his career at barclays in 1971, moved up to the role of corporate manager in coventry in 1992, and then. It demutualised and became northern rock bank in 1997, when it floated on the london stock exchange with the ticker symbol nrk. Although northern rock was not a particularly large bank it was at the time ranked 7th in terms of assets it was nevertheless a significant retail bank and a substantial mortgage lender. Sep 14, 2017 northern rock how the bank given the codename elvis changed the country it was a model built for good times, for a confident economy, but it fell into difficulty as soon as the financial. May 26, 2008 the fall of northern rock is essential reading for anyone wanting to understand the story behind the first run on a british bank since 1866. The fall of northern rock is essential reading for anyone wanting to understand the story behind the first run on a british bank since 1866.