subprime crisis and its effect on the northern rock bank

SUBPRIME CRISIS AND ITS EFFECT ON THE NORTHERN ROCK BANK

5/9/2011

Sub – prime crisis and its effects on Northern rock bank

Executive Summary

Banking is a very important operation in any country. It helps the people to keep their money

safe, save and can get some interest on the money. These banks can have a very major impact on

the overall money structure of the whole nation. So they are like the financial backbone of any

nation. For any nation, it is very important to have a strong back bone which means strong

banking structure.

Here, the dissertation is about looking for the structure of one very major bank of UK

which is Northern Rock Bank. There was a major crisis in 2007 in USA which was known as

subprime crisis and which had an adverse impact on the whole globe and banks. Here, this issue

is being dealt in very detail. The report is going to understand the subprime crisis and its impact

on Northern Rock Bank. (Barr.A ,2007)

The major research questions which are being dealt in the report are about the impact of

subprime crisis on the bank and how the management took action to come out of this crisis, the

management decisions to go for the nationalization of the bank and its impact on the overall

performance of the bank. This research is an attempt to analyze the steps taken by the

government and the top management for the situation.

The report will be carried out to have a detailed literature review about the concept of

sub-prime crisis, how it affected the banks and the economy of the nations and the whole globe,

its adverse impact on the banking structure and the management decisions and the effect of those

decisions. The research methodology section will be helpful to use the secondary data to have

more and better understanding about the impact by analyzing the secondary data and it will help

to give some recommendations on the basis of the findings from the study.

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Contents

Chapter 1.....................................................................................................................................................5

1.1)Introduction of the Study..……………………………………………………………………………………………………5

1.2) Background of the study…………………………………………………………………………………………………….6

1.3)About northern rock bank……………………………………………………………………………………………………7

1.4)Need of the study………………………………………………………………………………………………………………..8

1.5) Research questions…………………………………………………………………………………………………………….8

1.6) Research objectives…………………………………………………………………………………………………………...8

1.7) Organization of the dissertation…………………………………………………………………………………………9

Chapter 2 Literature Review .………………………………………………………………............….……12

2.1) Sub-prime crisis & its causes……………………………………………………………………………………………..12

2.2) USA & sub - prime crisis…………………………………………………………………………………………………….16

2.3) Sub - prime crisis & its impact…………………………………………………………………………………………...20

2.4) Sub - prime crisis & its impact on Northern rock bank…………………………………………………….…24

2.5) Nationalisation of Northern rock bank ………………………………………………………………………….….27

2.6) Key issues identified from literature ………………………………………………………………………………...29

Chapter 3) Research methodology…………………………………………………………………………………………………………31

3.1) Aims and objectives of research methodology………………………………..…………….32

3.2) Reaserch approach….…………………………………………………………………………………………………………32

3.3) Research strategy: case study….…………………………………………………………………………………………33

3.4) Alternative research study….……………………………………………………………………………………………..34

3.5) Experimental research strategy….………………………………………………………………………………………34

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3.6) Survey research strategy….………………………………………………………………………………………………..35

3.7) Sources of research….……………………………………………………………………………………………………….35

3.8) Methods of data collection….……………………………………………………………………………………………36

3.9) Observation…..…………………………………………………………………………………………………………………..37

3.10) Experimentation…..………………………………………………………………………………………………………….38

3.11) Simulation…..…………………………………………………………………………………………………………………..38

3.12) Interviews…..…………………………………………………………………………………………………………………..39

3.13) Questionnaire….…………………………………………………………………………………………………………….40

3.14) Strenghs of methodology….…………………………………………………………………………………………….40

3.15) Limitations of methodology….………………………………………………………………………………………..40

chapter 4) Analysis & interpretations .......................................................................................................41

4.1) Aims & objectives……………………………………………………………………………………………………………..42

4.2) Analysis of northern rock bank………………………………………………………………………………………….44

4.2a) Introduction …………………………………………………………………………………………………………………..44

4.2b) Background …………………………………………………………………………………………………………………...45

Chapter 5) Recommendations………………………………………………………………………………………………………………..63

5.1) Impact………………………………………………………………………………………………………………………………63

5.2) Recovery………………………………………………………………………………………………………………………….63

Chapter 6) References……………………………………………………………………………………………………………….............68

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Chapter 1

Introduction and Background of the Study

1.1 Introduction

This chapter is going to detail about the introduction of the study. This will contain the brief

introduction of the whole report, background of the study, this will helpful for raising the

research questions and the aim of the study and the research objectives. The organization of the

report will tell about the brief that what are being covered by the chapters so that it can give a

better understanding of the report.

Unlike many other industries, banking and financial institutions are known to be

more prone to crisis or issues. One of the most recent issues among banking and financial

institutions is the issue of the sub-prime crisis which hits the United States and affects other

international banks like Northern Rock. In the finance area, the US subprime mortgage crisis was

one of the first indicators of the late-2000s financial crisis, characterized by a rise in subprime

mortgage delinquencies and foreclosures which resulted in decline of securities backing said

mortgages. In United states, the banks had give higher amount of loans to the citizens for

purchasing the houses, the loans have been given to the persons who were not having income to

pay the loans and when they became defaulters, the government and the banks started taking

their homes back and to recover those money, they started selling the houses which got very less

amount of returns which is very negligible of the amount of the loans which were being given.

The banks incurred lots of losses and the banks got liquidity crunch and this whole event affects

the whole banking and central banking system of USA as well as the whole globe.

This affected lots of banks of US in 2007 which later on had an adverse effect on the

other banks of the globe, here the research is analyzing the effect on sub-prime crisis on

Northern Rock Bank of UK.

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http://en.wikipedia.org/wiki/Late-2000s_financial_crisis


1.2 Background of the Study

The study which is being carried out in the report is about looking the impact of sub-prime crisis

on the Northern Rock bank, the decisions taken by the management on that point and the

decision to make the bank a nationalized bank. The background of the study shows that the main

causes of the sub-prime crisis and its impact on the banks. Following Figure 1.1 shows that the

main cause of mortgage sub-prime crisis.

Figure 1.1: Subprime Mortgage Crisis

The reasons of the crisis are low interest rates and large inflows of foreign funds created easy

credit conditions for a number of years prior to the crisis which fuelled a housing market boom

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and encouraged debt-financed consumption. The USA home ownership rate increased from 64%

in 1994 to an all-time high of 69.2% in 2004. Subprime lending was a major contributor to this

increase in home ownership rates and in the overall demand for housing, which drove prices

higher. As, it is very important to understand its impact on Northern Rock Bank, there is a need

to have an overview of the bank also.

1.3 About Northern Rock Bank

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 brief introduction of Northern Bank is that it was established in 1997, was a bank

which performed very well in the duration of his establishment to the year of crisis and in these

ten years, there is enormous amount of growth in terms of revenues and sales and new

customers. At the time of crisis, the bank was not able to perform well and ultimately in

September, 2007 Bank of England had taken it and made it as a nationalized bank. The crisis had

made a lot of adverse impact on the performance of the bank. The further sections will detail

about it.

According to council of Mortgage Lenders statistics, Northern Rock is one of the top five

mortgage lenders in UK. In 2006, the bank had moved into sub-prime lending via a deal

with Lehman Brothers. Although the mortgages were sold under Northern Rock's brand through

intermediaries, the risk was being underwritten by Lehman Brothers.

The earlier introduction about the study, the background of the study, the understanding of the

sub-prime crisis and the causes of this, the overview of the Northern rock Bank has given a good

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http://en.wikipedia.org/wiki/Underwriting

http://en.wikipedia.org/wiki/Lehman_Brothers


hand to understand the research questions and these questions will be helpful for formulating the

research objectives.

1.4 Need of the Study

It is very important to understand the need of this study and how it is relevance for the subject

area and the student. This is very important for a management student and the practitioner to

understand the situations which are beyond the control of management, and the impact of these

on the business and on the economy. It is very important to have an understanding of the

contingent approach of the management, which helps to prepare for the turbulent situations of

the future. This study helps to understand how to take decisions in these situations to better

survive and get good results. (Fransesco Trbbi, 2010)

1.5 Research Questions

After understanding the need of the study, it is very important to find out what the research

questions are being undertaken in the study. These will help to formulate the research objectives

and this will help to carry forward the research.

The research questions aimed in this study are as follows:

How the sub-prime crisis had an adverse impact on the operations of Northern Rock

Bank?

What were the issues confronting the management at the Northern Rock during the sub-

prime crisis?

What decisions the management has taken to overcome the situation raised due to sub-

prime crisis?

What the suggestions can be put towards management to better handle such type of

turbulent situations in the future?

1.6 Research Objectives

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The above questions help to formalize the specific objectives to carry out the research and find

out the impaction for the management. The main goal of this research is to analyze sub-prime

crisis and its effects on banking and financial institutions. In particular, this paper attempts to

achieve the following objectives:

To determine the steps taken by the management during this crisis.

To discuss the management’s decision of nationalizing the bank.

To provide sound recommendation and conclusion about the issue.

To make an analysis of the situation and find out the results.

1.7 Organization of the Dissertation

Figure 1.2 shows about the organization of the dissertation.

Chapter 1 deals about the introduction and background of the study. The study is all about

understanding the impact of sub-prime crisis and its impact on Northern Rock Bank. It deals

about the major issues related to sub-prime crisis and its impact on the economy of USA and

whole globe. The chapter raises the issue of need for the study and the research questions and the

objective. It helps to build the base of the study and the research. These research questions and

the objectives will help to form the study for further.

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Figure 1.2: Organization of the Dissertation

Chapter 2 is all about the literature review of the study and its related issues. This chapter deals

about the major causes of sub-prime crisis and its impact on the global economy and the USA

economy. This chapter also deals about the impact of the sub-prime crisis on one of the very

popular banks of UK Northern Rock Bank. This deals about how it affected the bank, how the

bank was in the turbulent conditions and the decision of the Bank of England to make the bank

as the nationalized bank. It will talk about the major decisions the management has taken at that

time and how it impacted the whole operations of the bank.

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Chapter 3 is a chapter of research methodology. This chapter is helpful for the researcher to deal

about the study and how the research will be conducted to carry about it and find the results. The

chapter will deal about the type of the research the study is, the type of methods will be used to

carry out the research and the type of the data which will be used for the research and the method

used for the collection of the data. This will show the data collected and the tools of the data

collection.

Chapter 4 is about the analysis and interpretation of the data which are being collected in the

chapter 3. The different ways as charts, graphs and diagrams will be used to show the data

collected which will be helpful to show the analysis of the data and on the basis of this data, the

interpretations of the results and data which will be helpful for understanding the impact of the

sub-prime crisis on the bank.

Chapter 5 is making the recommendations on the basis of the analysis of the data and the charts

and the graphs which are being drawn on the basis of the data. These recommendations will be

for the management and the practitioners to understand the turbulent condition and the impact of

the condition on the management.

Chapter 6 is about the summary and the conclusion of the findings and the learning from the

study. This summary of the findings and the learning is helpful for the management for taking

actions for the future.

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Chapter 2

Literature Review

The chapter literature review is going to deal about the brief about the sub-prime crisis, its major

causes in the general for the housing industry and impact on the banking sector. The major

consequences of the crisis on the USA banks, home mortgage loan industry and then it will

discuss about the impact of the sub-prime crisis on the Northern Rock Bank.

Figure 2.1: People queuing outside a branch in Golders Green, London, to withdraw their

savings due to fallout from the subprime crisis.

2.1 Sub-prime crisis and its Causes

The sub-prime crisis is related to economic issue which is because of the reason of the less

liquidity in the hands of the company and this liquidity crunch has become a problem for the

firms to get operationalised very well and has been burst in a crisis for the banks and then for the

country and then reached to whole globe. This crisis has a main root in the high lending rates for

12

http://en.wikipedia.org/wiki/Golders_Green


the homes and then it had created high amount of risk for the borrowers with having low rates of

revenues and it had a ripple impact on the operation and the financial statements of the firm. The

higher sub prime rates have adverse impact on the whole global economy, business owners,

investors and creditors.

Figure 2.2: Sub-prime Crisis

There are lots of factors pervasive for the crisis in the housing and credit market. These

causes include the inability of home owners to pay their mortgage loan, overbuilding during the

boom period, risky mortgage products, inappropriate government policies, international trade

imbalances, bad monitory and housing policies, bond market and predatory lending practices of

mortgage lenders (Roubini, 2009; Jaffee, 2010).

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The causes can be classified in the following heads:

1. Bust in housing market: In USA, low interest rates and easy credit conditions have made a lot

of citizens to go for the mortgage loans for the homes. This had all increased the USA home

ownership rates 64% in 1994 and all time high 69.2% in 2004. Sub-prime lending was a major

contributor for these higher rates of increments. In 2006, typical American houses prices

increased to 124%.

Figure 2.3: U.S. existing home sales (2005-2009)

2. Homeowner Speculation: The major factor for sub-prime mortgage crisis is speculative

borrowings in residential real estate. During 2006, 1.65 million units of homes purchased (22%)

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were for investment purposes, with an additional 14% (1.07 million units) purchased as vacation

homes. These figures reached to 28% and 12% in 2005 respectively. In other words, a record

level of nearly 40% of homes purchases were not intended as primary residences. The 2006

decline in investment buying was expected: "Speculators left the market in 2006, which caused

investment sales to fall much faster than the primary market."

3. Government Policies: Both government failed regulation and deregulation contributed to the

crisis. In 1982, Congress passed the Alternative Mortgage Transactions Parity Act (AMTPA),

which allowed non-federally chartered housing creditors to write adjustable-rate mortgages. In

the early 1980s, there were lots of types of prime lending rates in which mortgage loan, primary

adjusted prime rate and balloon type payment system was more in the fashion. In 2011,

the commission reports from the financial crisis firm were that most of the financial firms had

not contributed at the time of crisis to come out of it. The GSEs participated in the expansion of

subprime and other risky mortgages, but they followed rather than led Wall Street and other

lenders into subprime lending. Economists argued in 2010 that the substantial rate of growth of

residential and real estate pricing bubble had made the case to those who argued that predatory

landings were primary causes of the crisis.

4. Inaccurate credit ratings: The credit ratings given by the credit agencies are also under scrutiny

for the credit ratings given to MBS on the basis of risky subprime mortgage loans. Figure 2.3 has

clearly depicts the downgrading by the credit rating agencies.

Between 2007 and 2008, the pictures seen about the global financial market and the

credit ratings given by the credit rating agencies has clearly shown a deprecation which can be

clearly seen in Figure 2.4 below. This all ratings had shown a negative impact on the profits of

the firm and this brought the share prices of the firms very low which was a major outcome of

this crisis and seen directly on the companies.

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Figure 2.4: Credit rating agencies downgraded ratings

2.2 USA and sub-prime crisis

“In the words of Mark Twain (1897) which are like this: the collapse of one financial

system is like one man is dying, then another and then another and you can’t deny that all

the systems are dying as collapse of the one system”.

The major impact of this crisis was on the Bretton Woods II, which was more about

having more investments from the foreign government and this had brought it on the end. This

system requires high amount of investments in the US by foreign governments and individuals. It

has doubt that the required faith in the US economy and financial system can be maintained in

the face of the dismal performance of US assets and institutions in recent months.

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Now the question arises that how did the current crisis develop and it made the whole

financial system collapse of US as well as whole globe. This is not such type of crisis which has

direct impact on the globe but gradually it has made the conditions so worst that the whole globe

and the banking system got affected in the crisis and it had brought a major recession for the

whole globe.

How did the current crisis develop and break out in the context of Bretton Woods II

dynamics? This is not the sort of crisis that many economists have warned would trigger a

collapse of the system. The potential crises that they have emphasized over the years were: an

end to official intervention in exchange markets, reserve diversification away from US assets, a

massive depreciation of the dollar against managed currencies, a general jump in real interest

rates, an outburst of protectionism, a rise in oil prices, or a geopolitical event.

Figure 2.5: US current account

Initially the lowering rates of interest and home loans encouraged to get more people home loans

but after some times, but because of this process, the danger generated and the temporary

compression of risk was confused with permanent changes. Since the premium available to

investors as reward for risk associated with maturity transformation disappeared while the

demand for spread persisted, the financial system was rewarded for supplying the spread product

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in some other way. To manufacture spread for those financial institutions that needed it, the

financial industry tapped into a new high-risk class of borrowers.

Figure 2.5 shows that the current account of the US and its percentage to GDP. These

types of crisis has made the assets less desirable as the problem assumed that the sub-prime crisis

will generate the act two problem which can disintegrate the international system as the US

assets can be further depressed as the equilibrium risk free interest rates. These all crisis had not

made the dollar doomed very much which can be seen from the below Figure 2.6.

Figure 2.6: Trade weighted dollar and Euro

The impact of the crisis had been shown in the figure which shows that the year 2007 has

faced the lot of depression in the value of dollar which had sustainably improve in the next year.

The following figure 2.6 shows the position of different indexes for the year 2008 and it can

easily show the impact of the sub-prime crisis and its effect on the different indexes.

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Figure 2.7: Major stock index in 2008

The financial turbulence, which had started with valuation confusions of home loan and housing

products, started to develop into a market and then it leads to a funding liquidity crisis:

losses on and valuation confusions of CDO products in the market, crunching market

illiquidity;

difficulties in issuing by bank-sponsored funds (conduit, SIV) financing the CDOs –

decline in funding liquidity;

made a lot of decline in securitization;

withdrawal of banks’ credit lines, the start of the funding liquidity crisis;

brings a lot of reduction of leveraged bank and investment bank positions, the deepening

of liquidity troubles, further price reduction of the structured products in the portfolio.

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In this manner, another self-perpetuating process of contagion started, jeopardizing both market

and funding liquidity through the bear market and deleveraging.

2.3 Sub-prime crisis and its Impact

The sub-prime crisis had a very adverse impact on the financial conditions of the US as well as

the whole globe. Between June 2007 and November 2008, Americans had lost around a part of

the quarter of their net worth. By early November 2008,the statistics for showing the impact is as

follows:

the S&P 500, was down 45 percent from its 2007 high.

Total home equity in the United States, which was valued at $13 trillion at its peak in

2006, had dropped to $8.8 trillion by mid-2008 and is still falling in late 2008.

Housing prices had dropped 20% from their 2006 peak, with futures markets signaling a

30–35% potential drop.

This had not only shown the adverse impact on USA and its banking system but the whole

globe’s banking system got affected of it. After Feb, 2007 it has started affecting the financial

sector in the whole globe.

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Figure 2.8: Loss of financial crisis as a proportion of GDP

(Source: Honohan–Klingebiel (2003), Hoggarth–Reis–Saporta (2001), IMF)

HSBC, in 2008 which is the largest bank has reported the first major loss because of the

crisis. During 2007, more than 100 of mortgage companies shut down, suspended their

operations or sold out. In 2008, when Lehman brothers and other very important financial

institutions failed, it made a shock to whole global economy and financial system. Following

Figures 2.8, 2.9 and 2.10 will show the impact of sub-prime crisis on the whole globe, US and

UK.

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Figure 2.9:U.S. Bank Earnings (2004-2008)

Figure 2.10 illustrates the liquidity crunch in the whole liquidity index which shows the

ripple effect that emanated from decreasing confidence in and default rates for US sub-prime

lending led to a global tightening in money markets which then trickled down to UK housing

markets in the middle and latter parts of 2007 and this effect continues into 2008.

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Figure 2.10: Financial Market Liquidity Crunch

(Sources: Bank of England, Bloomberg, Chicago Board Options Exchange, Debt Management

Office, London Stock Exchange, Merrill Lynch, Thomson Data stream and Bank calculations.)

This crisis had an adverse impact on many major financial institutions which were either

failed, bailed-out by the government or merged during the crisis. These are the firm which had

typically borrowed or invested large sum of their money or cash equivalent or relative to equity

capital. During 2008, five largest U.S. investment banks which include Lehman brothers, Bear

Stearns and Merrill Lynch were taken over by other companies, Goldman Sachs and Morgan

Stanly were bailed out by the US government. As a result of crisis in 2008, twenty-five US banks

became insolvent and which were being taken over by FDIC.

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2.4 Sub-prime crisis and its Impact on Northern Rock

Northern Rock is a substantial banking institution within the UK having been a member of the

FTSE 100, which “comprises the 100 most highly capitalized blue chip companies, representing

approximately 81% of the UK market”(FTSE International, 2008), since September 2001 until

its removal to the FTSE 250 in December of 2007. Northern Rock started its life as serving local

clientele. Northern Rock had very large ambitions. From June 1998 to June 2007, in the nine

years, its total assets grew from 17.4 billion pounds to 113.5 billion pounds with an annual

growth rate of 23.2%.

Figure 2.11: Composition of Northern Rock’s Liabilities

The major reasons for the liquidity risk and the crisis for the Bank were because of

certain institutional weakness in the UK’s regulatory regime which made happen such types of

the problems. The major flaws in the financial system of UK are as: there was a serious flaw in

deposit schemes of UK which led to the country to this problem, no established special

bankruptcy regime for banks , in the bank of England, there was no well-established or

24


predictable resolution regime for handling troubled banks, an institutional structure of financial

supervision that separated responsibility for systemic stability and lender-of-last-resort from

prudential supervision of individual banks and these are the banks which were located in the

financial authorities. These all brought very likely to be potentially hazardous in crisis

conditions.

Northern Rock had assets of over £ 100 billion in the ten years from the establishment to

the crisis year which shows the growth rate of 20 percent. Although it was only the seventh

largest UK mortgage lender, in the first half of 2007 its new mortgage lending accounted for

around one-quarter of the total in the UK. The funding gaps and securitization has been made

wider by looking for better deposits rates and which brought mortgage lending crisis conditions

for the UK wholesale market.

Problems started emerging in summer 2007 when there started lack of confidence in the

sub-prime mortgage market in the USA and this created the doubts in the business model of

Northern Bank. In August 2007, the bank was unable to repay the loans from the money market

which has been raised from securitization. These problems were more anticipated by the

financial markets which became very publicly and the bank was on the urge of the solvency.

On 14 September 2007, the bank sought and received a liquidity support facility from

the Bank of England, to replace funds it was unable to raise from the money market. This has

brought a tragic event in the history of UK and global banks in these last 150 years where all the

depositors were standing outside to the bank to get its deposits back as they had a fear not to get

what had in their savings and seeing others, all had started for the same to get their money back

and the scenario has been shown in Figure 2.1.

Northern Rock Crisis can be seen from the multidimensional perspective and the fault

line can be seen with respect to following issues:

The implications of securitisation and a consequent over-reliance on short-term market

instruments,

UK’s policies for deposit protection,

Money market operations of the Bank of England,

The institutional structure of financial regulation and supervision,

Practices used by banks for corporate governance,

The arrangements made by the banks for insolvency conditions.

25

http://en.wikipedia.org/wiki/Bank_of_England


The USA deficit which began to expand latter half of the 1990’s whereas the Asian

developing economies are seeing as current account surpluses expand. This is known as

global imbalance and these all situations saw a problem for the whole financial system and

which later on affected the whole globe and brought global recession.

Figure 2.12: Northern Rock Share Prices

Prior to the subprime mortgage crisis the bank was part of the FTSE 100 Index, but the

crisis conditions of the bank in 2007 had brought it on FTSE 250.The worst conditions arose

when the shares of the bank were delisted. In the annual report for 2007, which was published on

31st March, the bank occurred loss of £167 million. The report also outlined further details of

their proposed business plan. Further reports about the profitability spoke that the bank

announced that it had made a loss of £585.4m for the first 6 months of the year and that £9.4bn

of a loan from the Bank of England had been paid back, reducing the amount owed to £17.5bn

which can be clearly depicted by Figure 2.12

At the time of the failure of the Northern Rock Bank, the Bank of England tried to find a

private buyer. The government bank made an attempt to find a private market solution and bids

26

http://en.wikipedia.org/wiki/FTSE_100_Index


were invited. For qualifying the buying of Northern Bank, the four particular conditions were set

by the government which was:

The government will have a share in any upside gain to the buyer,

The buyer has to inject new capital in the bank,

Within three years the buyer has to make the repayment of Bank of England loans, and

Bidders needed to present a viable business plan.

There were no satisfactory bidder present for the purchasing of the bank and the

government of England made a decision to temporary basis nationalized the bank. This was

one of the biggest nationalizations ever undertaken in the UK and, as argued below, the bank

of England had used an Ad hoc british bank mechanism. The commission from the top of the

bank of England took first priority to make the decisions for the pricing and the valuation of

the share of the shareholders. It had brought a conflicting problem to the bank and the board

of directors as the assets values for the valuation of the bank seems and finds to be zero and

the payment of the invested money can be made by the deposit money of the bank of

England and that was the only way for the bank to get it safe and in the picture again.

The following words of Governor of Bank of England, Mervyn King has made the situation and

the scenario very clear which was :

The bank should help Northern bank in trouble and should try to get the confidence back

of the customers and it is possible only when the banks will be co-opearting and the strategy of

the bank should be to look for the interest rates which can help them to get the money back when

the situations and the conditions will be in the hands.

2.5 Nationalization of Northern Rock

As mentioned in the last section of the literature review about the crisis situation in the USA and

UK and its impact on the Northern Rock Bank and the insolvency condition of the bank, the

attempts made by the bank to attract any private buyer for the bank and at the end the Northern

Rock was being nationalized by the Bank of England.

27


Finally in September, 2007, the Bank of England has made a decision to make the bank

nationalized bank. A government panel had been appointed to decide a fair price for the

compensation to be offered to the investors of the share. Then in 2008, government set up a new

company named UK financial investment ltd to manage their share holding in Northern Rock.

The nationalization decision can be interpreted by the help of following conclusions:

The Treasury’s decision to nationalize 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.

Despite the enormous problems facing Northern Rock during the period of emergency

support, the Treasury saw fit to allow the company to write around £750 million of high

risk loans of up to 125% of the value of the property.

The Treasury had been aware of shortcomings in the arrangements for dealing with a

bank in difficulty since 2004, but the pace with which it acted to remedy these

shortcomings was leisurely.

At the time it nationalised Northern Rock, the Treasury did not know enough about what

it was taking on.

To get the things well settled, the Bank of England has made a debt reduction strategy.

Northern Bank had announced that it should use the measures that will help it to reduce bank

debt within three to five years. As of 30 September 2008 the bank is repaying the loan well

ahead of target, owing a net balance of only £11.5 billion of the loan that stood at £26.9 billion at

the end of 2007. In 2008, Standard’s and Poor’s had made a credit rating and revised the rating

for Northern Bank as positive and some more good news indicated the better and recovery

condition of the bank as in 2009, the bank had announced to give 10% bonus to its employees as

the bank is performing well in respect of paying its loan back to the government. In year 2009

and 2010, the bank made the announcements of successfully getting the targets of paying the

loans to the government. The very important recovery was being made as in October customers

appeared to be regaining confidence in the bank, when it emerged that there had been a surge in

the number of new accounts which had been opened. People appeared to see Northern Rock as a

28


safe place to put their money, given the current status as a nationalized bank which cannot fail.

The bank decided to remove some of their savings products from the market, as the bank has a

commitment to take only a 1.5% share of total UK retail deposits.

2.6 Key Issues identified from Literature

The literature discussed above showed the reasons for this crisis, the impacts of the crisis and the

management and government decision to make the bank nationalized. As the literature showed

that the bank was performing well in the year 1998 to 2007 but the flaws in the government

regulations, some mistakes by the management of the Northern Rock and some global conditions

had brought the worst conditions for the Bank and it became a historical case for the

administrators to be look into it. To safeguard the interest of the citizens and the customers and

investors of the bank, it was a very wise decision of Bank of England to make the bank

nationalized bank. The scenario of the performance of the bank before the crisis, at the time of

crisis and after the nationalization of the bank had been shown with the help of lots of figures in

the main body of the chapter which clearly depicted the impact of the crisis on the performance

of the bank.

This turmoil and the case had given a lot of suggestions to policy makers and compel to

think about the issues related to financial market. This crisis had made the another opportunity to

the all the entities ranging from IMF, standard international setting bodies for financial sector,

international rating agencies, national central banks and regulatory authorities and led them to

bring the architecture. A major source of financial crisis has identified as excessive dependence

of policy makers on bubbles—starting from credit bubble to asset price bubble, commodity price

bubble, and financial innovations bubble—for delivering longer phases of high economic

growth. The generalized global policy response—in the form of grand bailout plans funded by

larger government debt raised at very low interest rates—could fuel another bubble, in

government bonds and debt, which may become a source of risk and concern in future.

At the same time, regulators have increased their faith in ratings and models for their

financial stability assessments; which at best create illusory comfort, at the risk of leaving the

dangerous impression that risk has been assessed correctly. The sub-prime crisis revealed that the

sellers of insurance against default and the rating agencies jointly could convert poor quality

29


paper into the most sought after financial instruments; while bonus-driven investment bankers

have an incentive to sell these products.

This all seems to be very helpful for carrying out the study further where the report is

going to deal about the research methods and techniques going to be used for the analysis of this

descriptive study. The analysis and conclusion will help to make the recommendations and the

conclusion.

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Chapter 3

Research Methodology

Research methodologies can be quantitative (for example, measuring the number of times

someone does something under certain conditions) or qualitative (for example, asking people

how they feel about a certain situation). Ideally, comprehensive research should try to

incorporate both qualitative and quantitative methodologies but this is not always possible,

usually due to time and financial constraints.

Research methodologies are generally used in academic research to test hypotheses or theories.

A good design should ensure the research is valid, i.e. It clearly tests the hypothesis and not

extraneous variables, and that the research is reliable, i.e. It yields consistent results every time.

Part of the research methodology is concerned with the how the research is conducted. This is

called the study design and typically involves research conducted using questionnaires,

interviews, observation and/or experiments.

The term research methodology, also referred to as research methods, usually encompasses the

procedures followed to analyze and interpret the data gathered. These often use a range of

sophisticated statistical analyses of the data to identify correlations or statistical significance in

the results.

Objective, representative research can be difficult to conduct because tests can normally only be

conducted on a small sample (e.g. You cannot test a drug on every person in the world so a

sample needs to be used in research). This means that researchers need to have a very detailed

understanding of the types and limitations of research methodologies which they are using.

31


Research is thoroughly based on the study on particulars topic. It is search for data through

research we gather the relevant information. it is all about searching for knowledge. It is a

structured investigation to find out the solution for the current problem that we are facing. There

is needed to be unwrapped mentality to do a research. While doing a research it is vital to do it

with the past and the future data, through the research one can develop novel knowledge. Novel

techniques are as the solution of existing problem. It can make by applying scientific technique.

Research is used to improve existing facts and psychology. It is the improvement of technology

as well as human intelligence. This gives several types of themes to get solution for our problem.

The basic aim for the each and every research is to find some solution and enhance our

knowledge based as well. The research which constructed to find out novel problems, it is pre

structured known as exploratory research while the constructive research finds solution for the

difficulties. To tests the possibility of the solution whatever we found, the empirical research

used.

There are two types of research those are primary and secondary. Two types of method applied

in the research, those are qualitative and quantitative. Before research methodology we have

research to know these views of literatures. So we can find the significance of research easily. In

today’s world to take decision various studies are helpful to provide information to us. A

structured study availed us with the various types of knowledge to get bottom of all operational

difficulties. In this case, we will come to find out the solution for the northern rock bank with

respect to subprime crisis. This chapter is consists of the method that will be taken to study the

difficulties which are coming in the Northern rock bank due to the subprime crisis in the US.

( Hm Treasury 2007)

In this chapter first we will be introduce with the little picture of the research aims and

objectives that is why the research has been taken into the consideration, It will be helpful for the

respective persons, management, organization customers and readers as well to have a handle on

the causes to adopt the research approaches. The works will be done with the various sources to

collect the significant data. In the making of this research the data which is used, is both type of

data primary as well as secondary.

32


The strategies for the research will be executed in the research and the method of data collection

also includes in this chapter.

REASERCH APPROACH

There are research methodologies known as primary research and secondary research. Primary

research involves collecting data that does not already exist while secondary research take

existing research data and analyzes it. After an issue has been identified, primary research is

used to collect some secondary data after the researcher has gotten a little insight into what the

problem or situation is. There are plenty of ways to get this data, including through

questionnaires, phone interviews and direct observation.

Research approaches are concern with the series in which research has been made and the

techniques which have taken place in this specify research. To conduct a perfect research, first

there is need to examine the entire factor through which researcher becomes capable to give the

solution for the problems here, the views of literature have been taken for the study to explain

definite difficulties in the research. There are two types of approaches have been taken shoes are

quantitative approach and qualitative approach as well.

With primary research, there are several basic ways that data can be collected. First is through

Qualitative research: Which can include focus groups, interviews and observations from

people participating in the interviews and group sessions. Quantitative research gathers data

through work in the field, lab experiments, surveys and other methods of information gathering.

The advantages of primary research are control over the information that is collected. The

researcher can then customize how they want the research to go and how long it should take.

33


Not only that, all the data the researcher collects belongs to them. There are also some

disadvantages such as cost. In order to find primary data, the research can get pretty expensive.

The process can also take a long time since the data must be researched instead of just having

secondary data already available. Since it takes some time to do the research, the findings may

already be outdated by the time they are derived.

Quantitative research: It is a way to collect data using scientific methods like creating models,

hypotheses and theories. It is the collection of empirical data and the modeling and analysis of

that data. After all the research turns up results, those results must be evaluated. This is a much

more complicated process than what it appears, but this will give you a rough idea of what it is

all about.

A proper research need to have both type of content. When the data will be collected for the

research that can be primary data is known as quantitative research, the techniques and the

methods that will be applied in the research are called qualitative approach. The both approaches

will be use full the act against the particular problem. Qualitative data supports the primary data

for the study. Qualitative research will helpful to built a model and make the methods to bring

the solution of the problem. Generally the data will be collected through the individual

RESEARCH STRATEGY:

Dissertation has some technology and elements in the research structure. We have gathered the

information to analysis the facts and figures. Then the dissertation has some structured method

and predetermined technology. After this the research will be executed. To gather the proper

data, the proper technique should be used then only the collected data would be the perfect data.

So it is suggested to use research methodology. A thoroughly study used to determine the

method of sampling and size of sample also taken with full of awareness. In the research

objective has also determined so they can find the approval and conclusion in the easy way. This

strategy has been used to make sure that the facts and figures have been taken in detailed to make

the dissertation. The various types of methods are calculated in the research and after the analysis

the proper method will be opt. we will come to know the several results and then we have to

obtain best method among the all method of investigation. This study will ensure that the

34


methodological investigation has been taken to appropriate method of research and then to come

on desired result.

ALTERNATIVE RESEARCH STUDY

A researcher can use the various sources to find out the result. It means there can be many

strategies and methods which can be apply in the research. For example there can be survey,

structured action etc.(Charles, 2009)

EXPERIMENTAL RESEARCH STRATEGY

This is the strategy in which there are several types of circumstances can be obtained to do

experiment on. This is fully structured research based on well designed association. In this

research scientific technique has taken place as center of attention. The experimental research is

not suitable for the topic related with attrition rate. Because of there are so many factors affecting

examination in the BPO segment of IBM. There are distinct basics of this study. This research

includes the human factor and the characteristics of human is non predictive in nature, way of

35


thinking, they give importance to the relation with people. So the research cannot go with this

research.

SURVEY RESEARCH STRATEGY

Through the survey we come to now the current scenario related with the study of the specify

topic. Survey includes either all the people related with the problem or some of the people

among them. But in this case we cannot take the survey of the all people of the Northern Rock

Bank, so we only bring some of the people to conduct a survey.

DATA COLLECTION

It is the course of action to gather the data. The main aim is to find the solution of our

problems through the data. We will analyze the data whatever we have been collected to make

decision , the data is need to be analyze and the proper way should be taken to gather the data.

The method are also specified when we are researching a particular topic.

Data collection is a term used to describe a process of preparing and collecting data - for

example as part of a process improvement or similar project. The purpose of data collection is to

obtain information to keep on record, to make decisions about important issues, to pass

information on to others. Primarily, data is collected to provide information regarding a specific

topic.

A formal data collection process is necessary as it ensures that data gathered is both defined

and accurate and that subsequent decisions based on arguments embodied in the findings are

valid. The process provides both a baseline from which to measure from and in certain cases a

target on what to improve.

Types of data collection

1-By mail questionnaires

36


2-By personal interview.

Other main types of collection include census, sample survey, and administrative by-product and

each with their respective advantages and disadvantages. A census refers to data collection about

everyone or everything in a group or population and has advantages, such as accuracy and detail

and disadvantages, such as cost and time. A sample survey is a data collection method that

includes only part of the total population and has advantages, such as cost and time and

disadvantages, such as accuracy and detail. Administrative by-product data is collected as a

byproduct of an organization’s day-to-day operations and has advantages, such as accuracy, time

simplicity and disadvantages, such as no flexibility and lack of control.

In this case the study all and all can be classified as descriptive research. This research is also

called as statistic research. Descriptive research used to know answers of the questions, what we

are searching for. Here, descriptive research used on all and all that can be studied. There are so

many limitations also. But the descriptive research is appropriate for the study. In this case, this

study can give proper description for the causes and effects. The dissertation is also made of

exploratory research. Exploratory research has used to study available data. This includes

unstructured communication with consumer and management. In this case, it is very necessary

to know the fact from them and structured information through the detailed interviews. An

exploratory research may not make us come to take any decision but it is very helpful to get

important review on the given circumstances.

There are two types of sources used in the research. To conduct any of the research, it is vital

aspect to gather proper data. The data can be gathering through primary research method or

secondary data research method as well. A researcher has to use both of the method to gather the

proper data for the research. The full information can get through the primary and secondary

data. Secondary data is used to support the primary data.

Primary data has been made of the individual interviews, questionnaire and group examination.

This will give us whole information in detail. To get the primary data the method used are

qualitative and quantitative methods. (Janet. 1999)

37


To study, each and every research demands for data. Data collection is very important process.

Analysis is conduct on the data which is collected. So it is vital to gather right data from the

appropriate sources. When the researcher gathers the data which is not structured and from the

original source then it is called the primary data. The primary data is the specify data according

to their needs. The primary data has been collected for the particular research topic. That topic

can be any type of issue. In this case, the issue is subprime crisis and its impact on the Northern

rock bank. So the research can be conducted with the people who has been affected by this crisis

and the management of Northern rock Bank. The form can be any type of according to

researcher. It can be too costly to search primary data. It will also take much time. But

sometimes it is vital to do this research. Many times researcher gathers the data from the

secondary data sources. Secondary data gathers from the primary data sources and it saves lots of

time. Some communities or organization works for that type of research. Data can be collected

through several techniques. Here, the various sources or tool to gather the data have been

described.

The researcher needs to gather some of the data with originate. This data may be the data which

have been not gathered before. Secondary data is already structured data. Means it has been

gathered already by some else and we are going to gathering from them. Secondary data can be

available easily. These data are structured information that a researcher can use in the research.

In this case published data can be used as the secondary data or the data which have been not

published also used in this. The records which a firm can bring as the data, the journals and

magazines can also use to gather the data for the Northern Rock Bank and the effect of Subprime

crisis on it. Normally the common data can be useful in the related research. The advantage of

the secondary data is that, it is already structured so there is no need to construct them. The

secondary data can be provided easily for the research. Secondary data is used to support primary

data. Here, bureau of public enterprise and census reports and government data will be work as

secondary data. Cost of secondary data will be so less. Secondary data also has some draw backs,

that the data might be not the latest.

Selection of a data collection method is depending on the type of research. There is no one who

can suggest a particular method. First one has to do comparison analysis among the methods and

38


then the method can be chosen. An appropriate selection of the method is requirement of the

research. So the researcher can obtain more than one method to gather the data.

OBSERVATION

Observation is related with the viewing something properly. The view has been done for opt

something from the situation. Observation may have not the particular reason. It can start

informally. But this is not the method just for entertainment. The observation method can be very

useful method if the research and the observation have been structured.

In this case, the observation can play huge role. The focus should be on the subprime crisis and

its effect on the bank sector, especially on the Northern Rock Bank. Through the structured

observation of the situation in the US can be observed. After seeing the circumstances, the

analysis can be done. So the data can be gather for the specify research. Observation can be

controlled and out of control as well. Observation can be conducted directly or indirectly.

INTERVIEWS

The qualitative research interview seeks to describe and the meanings of central themes in the

life world of the subjects. The main task in interviewing is to understand the meaning of what the

interviewees say. (Kvale,1996)

A qualitative research interview seeks to cover both a factual and a meaning level, though it is

usually more difficult to interview on a meaning level. (Kvale,1996)

Interviews are particularly useful for getting the story behind a participant’s experiences. The

interviewer can pursue in-depth information around the topic. Interviews may be useful as

follow-up to certain respondents to questionnaires,e.g., to further investigate their responses.

(McNamara,1999)

IMPORTANCE OF INTERVIEW

Interviews are completed by the interviewer based on what the respondent says.

Interviews are a far more personal form of research than questionnaires.

In the personal interview, the interviewer works directly with the respondent.

Unlike with mail surveys, the interviewer has the opportunity toprobe or ask follow up

questions.

39


Interviews are generally easier for respondent, especially if what is sought is opinions or

impressions.

Interviews are time consuming and they are resource intensive.

The interviewer is considered a part of the measurement instrument and interviewer has

to well trained in how to respond to any contingency.

The interviews depend on the researcher that what type of interview they want to hold. The

interview can be formal and informal and it also can be a mixture of both types of interviews.

Interviews are same as face to face conversation. There can be personnel interview in which the

ratio will be one to one. Interviews also have the one to more than one ratio. So it is based on the

type of research. In this research time is also an important factor. If there is sufficient time then

the individual interviews will take place for more appropriate feedback. For the interviews the

questions have already designed to know desired result. But also there can be unstructured

question during the interview as per the situation.

It is the vital method to gather the data. It is two ways communications which have take the place

for a particular study. It is communication between the interviewer and the interviewee. In the

case, the researcher is interviewer and the respondents are the interviewee. Interview should be

focused on the one topic. The interview includes answers of the questions and the observation

from the signs and the facial expression. (Masciandaro, D, 2003)

Interview can take place in a research as the primary method or the supporting method. Interview

can be in the form of direct or telephonic. It can be structured or unstructured. Usually some of

the important questions are preplanned but there can be unstructured as well as per the situations.

It is best method for the research where the respondents are less educated. It gives quick

response from the respondents about their opinion on the problem and the belief on the

recommendations. The respondents give answers according to their past knowledge and future

expectation. For the qualitative information, this method is used. When the number of qualified

interviewees is in sufficient range then the interview can be conduct.

In the view of some researcher the interview method is better than other methods to gather the

data. Respondents also interested to be with the oral conversation than the written. If the

40


interviewer is intelligent then he can read the face of the respondents and conclude some novel

theory. For the interview process it is necessary to prepare question first. We have to prepare

question with respect to our topic. Then the researcher should give the introduction of the issue.

Then make the connection with the respondents, who has proper knowledge about the issue.

Then start the interview, record it and close it with thank. Interview can conduct with the several

of modes:

Telephonic interview is the time saving method. It can be called the non-personnel method.

When the time is less and interview need to be conducted then the group interview can be hold.

It is conducted when the interest of respondents are common.

QUESTIONNAIRE:

Questionnaires are an inexpensive way to gather data from a potentially large number of

respondents. Often they are the only feasible way to reach a number of reviewers large enough to

allow statistically analysis of the results. A well-designed questionnaire that is used effectively

can gather information on both the overall performance of the test system as well as information

on specific components of the system. If the questionnaire includes demographic questions on

the participants, they can be used to correlate performance and satisfaction with the test system

among different groups of users.

It is important to remember that a questionnaire should be viewed as a multi-stage process

beginning with definition of the aspects to be examined and ending with interpretation of the

results. Every step needs to be designed carefully because the final results are only as good as the

weakest link in the questionnaire process. Although questionnaires may be cheap to administer

compared to other data collection methods, they are every bit as expensive in terms of design

time and interpretation.

The steps required to design and administer a questionnaire include:

Defining the Objectives of the survey

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Determining the Sampling Group

Writing the Questionnaire

Administering the Questionnaire

Interpretation of the Results

What can questionnaires measure?

Questionnaires are quite flexible in what they can measure, however they are not equally suited

to measuring all types of data. We can classify data in two ways, Subjective vs. Objective and

Quantitative vs. Qualitative.

When a questionnaire is administered, the researchers control over the environment will be

somewhat limited. This is why questionnaires are inexpensive to administer. This loss of control

means the validity of the results are more reliant on the honesty of the respondent. Consequently,

it is more difficult to claim complete objectivity with questionnaire data then with results of a

tightly controlled lab test. For example, if a group of participants are asked on a questionnaire

how long it took them to learn a particular function on a piece of software, it is likely that they

will be biased towards themselves and answer, on average, with a lower than actual time. A more

objective usability test of the same function with a similar group of participants may return a

significantly higher learning time. More elaborate questionnaire design or administration may

provide slightly better objective data, but the cost of such a questionnaire can be much higher

and offset their economic advantage. In general, questionnaires are better suited to gathering

reliable subjective measures, such as user satisfaction, of the system or interface in question.

Questions may be designed to gather either qualitative or quantitative data. By their very nature,

quantitative questions are more exact then qualitative. For example, the word "easy" and

"difficult" can mean radically different things to different people. Any question must be carefully

crafted, but in particular questions that assess a qualitative measure must be phrased to avoid

ambiguity. Qualitative questions may also require more thought on the part of the participant and

42


may cause them to become bored with the questionnaire sooner. In general, we can say that

questionnaires can measure both qualitative and quantitative data well, but that qualitative

questions require more care in design, administration, and interpretation.

STRENGHS OF METHODOLOGY

Through the methodology one can come on the facts and figure on form the saw data. This stage

include the methods and procedure, which will give us the analyze data. Through the research we

will come to know the impact of Subprime crisis on the Northern Rock Bank. The research is

based on various types of observation. The qualitative and quantitative data will be helpful to get

desired outcome.(Roubini, 2009)

LIMITATIONS OF METHODOLOGY

A good research must have some critical factor those are consistency, soundness and time

control. In the inductive research highly thinking is necessary to get outcomes. The method

should be free of any type of biasness. It will be difficult to develop the conclusion from the

comstomers and the management who might be bias toward their way own view towards the

problem of the Bank and the operations. And hence this research which will not be towards a

perfect conclusion of the opearations of the Bank. The data analysed here in this research was

meagerly based on the information gathered by the respondents.

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Chapter 4

Analysis & Interpretations

INTRODUCTION OF NORHTERN ROCK BANK

Northern Rock plc (former London Stock Exchange ticker symbol NRK) is a British bank, best known for

becoming the first bank in 150 years to suffer a bank run after having had to approach the Bank of

England for a loan facility, to replace money market funding, during the credit crisis in 2007. Having

failed to find a commercial buyer for the business, it was taken into public ownership in 2008. It is based

at Regent Centre in Newcastle upon Tyne, United Kingdom. Formerly the Northern Rock Building

Society, the bank was formed in 1997 when the society floated on the London Stock Exchange. Since 1

January 2010 the Northern Rock name has referred to two companies – this bank, Northern Rock plc,

and a separate asset company, Northern Rock (Asset Management) plc.[

Northern Rock Building Society was formed in 1965 as a result of the merger of two North East Building Societies; the Northern Counties Permanent Building Society (established in 1850) and the Rock Building Society (established in 1865). During the 30 years that followed, Northern Rock expanded by acquiring 53 smaller building societies, most notably the North of England Building Society in 1994.

Along with many other UK building societies in the 1990s, Northern Rock chose to demutualise and float on the stock exchange, to be able to expand their business more easily. Throughout this period a concern against demutualisation was that the assets of a mutual society were built up by its members throughout its history, not just by current members, and that demutualisation was a betrayal of the community that the societies were created to serve. Northern Rock chose to address these concerns by founding the Northern Rock Foundation. At its Stock Exchange flotation Northern Rock distributed shares to members with savings accounts and mortgage

44


loans. It joined the stock exchange as a minor bank and was expected to be taken over by one of its larger rivals, but it remained independent.

In 2000, Northern Rock gained promotion to the FTSE 100 Index, but was demoted back to the FTSE 250 in December 2007 and later suspended from the LSE due to the bank's nationalization.

On 14 September 2007, during the financial crisis of 2007–2010, the Bank sought and received a liquidity support facility from the Bank of England, following problems in the credit markets caused by the US subprime mortgage financial crisis.

The bank was nationalised at 00:01 on 22 February 2008 as a result of two unsuccessful bids to take over the bank, neither being able to fully commit to repayment of taxpayers' money. In doing so the Government effectively took ownership away from its shareholders, and as of October 2009 without reimbursement. The media also reported cases where some shareholders had their life savings in the shares, which were taken from them.

On 1 January 2010 the bank was split into two parts, assets and banking. In June 2011 the bank was officially put up for sale back to the private sector.

The chapter analysis and findings includes several types of method with respect to qualitative

research which is vital for the study. Here, all the aspects would be shown that have been taken

for the research.

THE QUESTIONS WITH WHICH WE WILL PREPARE QUESTIONNAIRE

It is very important to find out what the research questions are being undertaken in the study.

These will help to formulate the research objectives and this will help to carry forward the

research.

The research questions aimed in this study are as follows:

How the sub-prime crisis had an adverse impact on the operations of Northern Rock

Bank?

What were the issues confronting the management at the Northern Rock during the sub-

prime crisis?

What decisions the management has taken to overcome the situation raised due to sub-

prime crisis?

What the suggestions can be put towards management to better handle such type of

turbulent situations in the future?

45


DATA ANALYSIS:

Data analysis is nothing but a process in which we have done the concentrated effort on the

transforming. Here, the only objective is just find the appropriate information and analyze them

to get proper result. Through the analyzing we can get the final crux to take the needed decision

for the improvement of the Northern Rock Bank. In the data analysis there are levels with all

sides of the technique involved in it with the various themes. There is a data analyzing technique

that is called data mining. In the data mining technique which is used is not for the explanation

only but it focuses on the knowledge projecting. Organizational information can be collected

through Business intelligence. There are many types of the application; those are exploratory,

descriptive and confirmatory. Novel characteristics can be suggested through the exploratory

data analysis. Confirmatory analysis is for the analyzing the hypothesis. To know the class of the

data and find the take out text analytics can be applied. The originator for the data of the analysis

is the data integration.

When the data comprises a structured ordered then the primary information can be gathered.

With the data analysis we can convert the unorganized data into the organized data and it reveals

the data in the information. There can be thoroughly filtering in the process of analyzing the data

and the proper center of attention is required for the process. It is vital to analyze the data to get

the desired result. there is a lot of levels to analyze the data. It is the process in which we will

convert the incorrect data into the correct one. It can be only when we are on in the first stage of

the data analysis that is the entry of the data. All the information should be held and keep it

safely for the future requirement. There should be a copy of the original information and it will

be better if that would be in the several variables and syntax.

46


Initial data analysis and the primary analysis have different features. The initial analysis is

refined of the whole analysis. The goal is to take initial data consideration analysis of the

research questions. This includes the excellence of the data. There must be the proper instrument

for the measurement of the quality.

Main data is the most important data analysis.

This is the analysis where the researcher gets conclusion over the questions whatever has been

asked. Here, the initial draft has made by the this analysis for the research. In the main data there

should be exploratory and the confirmatory approaches. the approaches should be decide before

the data is gathered. Research approaches are concern with the series in which research has been

made and the techniques which have taken place in this specify research. To conduct a perfect

research, first there is need to examine the entire factor through which researcher becomes

capable to give the solution for the problems here, the views of literature have been taken for the

study to explain definite difficulties in the research. There are two types of approaches have been

taken shoes are quantitative approach and qualitative approach as well.

A proper research need to have both type of content. When the data will be collected for the

research that can be primary data is known as quantitative research, the techniques and the

methods that will be applied in the research are called qualitative approach. The both approaches

will be use full the act against the particular problem. Qualitative data supports the primary data

for the study. Qualitative research will helpful to built a model and make the methods to bring

the solution of the problem. Generally the data will be collected through the individual

interviews and questionnaire.

47


ANALYSIS OF NORTHERN ROCK BANK

INTRODUCTION

The study is based on the crisis happened in the year 2007. This crisis not only affected for the

US but also the whole world. Here, we are going to analyze the minus points of the bank of UK

that is Northern Rock Bank. There were a lot of drawbacks but the primary one is there was not a

proper management of holdings and lending as well. So the researcher found the problem of the

management. The Bank was involved in the bulk collection but the appropriate thing was to

gather both types of operations large as well as from small retailers. At the time of the crisis the

huge investment get back. If there were enough retail investment so there would be something in

the hand. The people had taken the loan in the over draft and they became insolvent when the

bank asked for the recover the loans.

There was a comment by some bank analysts that the Bank has to shut the doors. It has to be sold

itself. There is nothing left with the bank. They have one month to manage the selling of the

Northern Rock Bank. The nature of Northern Rock Bank was low risk but it rapidly converted

into the mixed asses that are the secured residential mortgages.

The nature of Northern Rock Bank was low risk but it rapidly converted into the mixed assets

that are the secured residential mortgages.

Data from : http://companyinfo.northernrock.co.uk/

£m Residential Commercial Unsecured Total

2006

Gross 28,972 423 3,594 32,989

Net 15,090 40 1,491 16,621

Closing balances 77,292 1,560 7,277 86,129

2005

Gross 23,618 408 2,853 26,879

Net 13,350 5 1,200 14,555

Closing balances 62,257 1,523 5,789 69,569

secured residential mortgages

48


Data from: http://companyinfo.northernrock.co.uk/

BACKGROUND INFORMATION OF MORTGAGES

The success of the Northern Rock Bank was as a symbol for the northeast region. As they have

novel life for the traditional sectors. Northern Rock Bank was the highest paying bank with

respect to the charity and they had sponsored the sports team there. So the above reasons are

sufficient to understand the trust level of the customers on the Northern Rock Bank. The

Northern Rock Bank had gone the over with respect to mortgage assets not as the traditional

funding. The bank has been deal in the covered bonds that is put the securities against the loan.

The difference was between the deposits and loan prepared by the security notes. There were a

lot of banks in UK who were giving the large amount as a loan and the funding as well. But that

was the drawback of the bank also.

There is a lot of difference between the traditional model and the subprime model.

49


In the traditional approach the bank has been given loan to home buyer. And the home buyer had

been repayment directly to the Bank. But in Sub-prime model Bank has been taken mortgage

bonds from the international market and gave loans to the buyers which will be repaid in

Installments by to the bank and bank will paid the amount taken from the market.

The following data is analysed by Tha Management for the Mortgages during the

Subprime Crisis So to calculate the amount of Impact on the Bank and for the

Nationalization of the Bank.

1. Gender of respondents

40%

60%

female male

Gender of respondents:

Data collected for the analysis is based on questionnaire. for this both male and female have been

taken as respondents which comprises of 40% female and 60% male respondents of total

number of respondents.

50


2). Age group of respondents:

20-3132-43

43- above

0%5%

10%15%20%25%30%35%40%45%50%

Age %

Age %

The total number of respondents so taken has been categorized into three different levels of age

groups ranging from 20 years to 43 years and above.

The age group of 20 years to 31 years comprises 20% respondents, the other level of age group

ranges from 32 years to 43 years which comprises 30% of total respondents and the final group

is of 43 years and above having 50% respondents.

51


3).Qualification of respondents:

less than quali-fied qualified

high qualified

0%5%

10%15%20%25%30%35%40%45%50%

qualification in %

qualification in %

For the purpose of analysis we have taken all types of respondents ranging from less qualified to

highly qualified. The group of less qualified consists of 13% respondents the other group is of

qualified people consists of 47% respondents and the final group is of highly qualified people

which consists of 40% respondents.

52


4).level of respondents:

employeemanagers

account holder

0%5%

10%15%20%25%30%35%40%45%50%

%

%

The respondents for the analysis point of view are directly linked to the northern rock bank

holding different levels at the bank. The various respondents are employees, manager and

account holders (borrowers and lenders both). In which employees are 20%, managers are 50%

and account holders are 30%.

53


5).Involvement year:

%

0-33-8more than 8

For the analysis the involvement year of respondents have been taken from initial year to more

than 8 years. 35% of respondents were involved with the bank for 3 years, 35% of respondents

were involved from 3 years to 8 years and for more than 8 years only 30% of respondents were

involved with the bank.

54


6) computerized system for working

always

occassionaly

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

%

%

The northern rock bank works on computerized system. when the respondents were asked about

the system of working of bank they respond that the bank always work on computerized system

of banking about 90% they held their work on computers and occasionally 10% they depend on

manual work. Hence management analysed the situation for the nationalizing the Bank and the

consumer behavior on the Subprime crisis.

55


7) According to you the regulatory policies are:

in %

strongnutralweak

When the respondents were asked about regulatory policies of the bank they respond that the

bank had 40%-40% of strong and weak regulatory policies and 20% of neutral regulatory

policies. Hence management analysed the situation for the nationalizing the Bank and the

consumer behavior on the Subprime crisis.

56


8) Deposit base

large small0%

10%

20%

30%

40%

50%

60%

70%

80%

in %

in %

The respondents having large deposit with the bank were 75% and having small deposit were

only 25% this is because the bank generally preferred bulk depositing by their customers. Hence

Bank Management came up with the total amount of Deposit that of the Customers of the Bank

are having kind of deposits with the bank So that thay got to analyse the total amount of money

deposited from the Costumers and their behavior towards the bank. Hence management

analysed the situation for the nationalizing the Bank and the consumer behavior on the Subprime

crisis.

57


9) Flow of information with respect to Northern rock bank’s operation:

efficient non efficient0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

%

%

According to respondents the flow of information was only 20% effective and about 80% non-

effective. This means that there was problem in smooth flow of information within the

departments and across the bank. Hence Bank Management located the problem that actually

cause the smooth information flow of the Bank toward the customers.

\

58


10) Management efficiency of the bank:

1

2

0 0.1 0.2 0.3 0.4 0.5 0.6

bank's efficiencyin %

According to respondents the operational efficiency of the management of northern rock bank

had 40% strong and had 60% weak, efficiency. Hence Bank Management located the problem

that actually causes the smooth operation of the business, and obstacles which actually faced by

the bank towards the service that given to the customers.

59


11) According to you is nationalization a correct decision:

yes no0%

10%

20%

30%

40%

50%

60%

70%

80%

in %

in %

According to 70% of respondents the decision taken for nationalization of bank was correct and

30% of the respondent said it was not a correct decision. Hence Decision was made by the

management to make the banj Nationalized.

60


12) Trust on management of northern rock bank:

%

yesno

According to 35% of respondents they had trust on the management of bank whereas 65% of

them do not have any trust on management. That was due to the inefficiency by the management

of the bank.

61


13) Have work structure changed the operations of the northern rock bank:

strongly agree agree disagree0%

10%

20%

30%

40%

50%

60%

improved operations

improved operations

According to respondents 30% of respondents strongly agreed that the work structure has

changed the operations of the bank and 50% of them agree where as 20% of them disagreed

about such changes in bank. Hence steps taken by the management during this crisis was

analysed

14) According to managers, is nationalization favorable to the economy?

62


yes no0

1020304050607080

in favor

in favor

80% managers are in the favor of nationalization of bank. Whereas 20% of the mangers hold that

nationalization of bank was not in the favor of economy. Hence the Bank efficiency, smooth

operations, smooth flow of information and Customer trust is analyzed and worked out.

Here, in the above questionnaire there were a group of respondents. The group was closely

associated with the Northern Rock Bank. The group consists of the employees, Manager,

borrower and lender as well. The reason behind it is they were suffered at the moment of crisis

so they can answer better than anyone else. There is no biasness with the gender. This is the

expected ratio of the male and female with respect to their account holdings. All type of educated

people has been taken for the questionnaire. There are the people who are engaged with the bank

63


have different time period. That can be less than one year or more than 8 years. According to

respondents there is computerized system for workings in the Bank but in their view there is lack

of information with respect to flow in the operations. In the views of the respondents there is

strong management as well as weak but the respondents think that there is normal regulatory

policy. There should be improvement in the policies. Respondents think that there has been a

correct decision made when the Northern Rock bank become nationalized. That would be the

beneficial decision. We found that people has lack of trust on the management of the Northern

Rock Bank, that is the area of the improvement. The customers are not satisfied with the Bank. It

means the level of the customer satisfaction is low. But the respondents are also agreeing that

there is a change in the operations with respect to their preplanned work or the work structure.

There are many numbers of people who think that there is a strong improvement after the

nationalization. In the questionnaire there was a special question for the managers that, is

nationalization beneficial for the economy. That was the session to know the views of the

expertise on the issue of nationalization. So Most of the managers are agreeing to obtain the

nationalization and they had described the benefits for the nationalization of the Northern Rock

Bank. It attracted the customers and also keeps the trust again in the Northern Rock Bank. (A.

Kirman, 2010)

This questionnaire is to know the desired answers and to get the appropriate analysis, through

which the researcher can give the recommendations and the suggestion for the efficient working

of the Northern Rock Bank. Through the findings we can suggest the recommendations over the

problem regarding the management and that could be applied in the real operations for

improvement.

64


Chapter 5

Recommendations & Conclusion

During the most three expensive days in 2007, the bank had a unforgotten experience. The

problem arisen in this year is people had gone their confidence from the asset that is mortgage

bank security class. This was associate with the subprime mortgage is US. People had got a

doubt on the feasibility of northern rock. That was the period where the whole UK banks came

for the help of northern rock. Northern rock got important help from Bank of England, regulatory

authority, and financial services authority and from the UK’s financial government office as

well. The British bank name the northern rock was seriously affected by the crisis had came in

US that is subprime crisis. British government has been taken over to the northern rock bank in

the year 2008. the northern rock had a poor past with respect to loan credibility. but at last

northern rock b had needed a great amount and in that emergency bank of England helped it out

and done the funding . With the money market using funding, this was full of subprime mortgage

bundles so it called building society association. (Bernanke,Bs, 2007)

IMPACT

UK bank was not helped to overtake the northern rock. UK bank wanted to give back the

ownership to the bank. But the people had no trust in t

he northern rock and people needed safety. They were worried about their economy deposited in

the bank. In the 2007 the situation of northern rock bank was exactly, people were in queue to

withdrawn their money. Whole UK government was requesting to the people not to closed their

account and be calm to the account holder.

RECOVERY

Northern rock bank now starts with retail deposit and they will not stay with takes pair loan

money. they are ready to sell. It is the difficult scenario for the banks but now northern rock bank

65


is requesting and suggesting the a/c holders to say their money in the accounts. The bank will

definitely move forward and will earn profit. The time is for beneficial and honorable banking

execution. It 2007 the basel committee which is regulatory for the banking supervision first time

whished for a liquidity set. In this set the bank has to keep or maintained the account with the

enough cash to compare sufficient value with the liability. Even despite the fact that UK raised

its limitation for the compensation for insuring bank. The committee wished to have observation

on each four or six year and it might be controlled the liquidity standard. (Barr, A., 2007)The

subprime issue was the main reason behind Northern Rock’s crisis. The crisis and issue affected

Northern Rock’s reputation in the market and also decreased its performance and profitability.

The subprime mortgage resulted in poor assets quality for the banks. Due to the issue Northern

Bank faced financial crunch and had very tough time to meet payment obligation of high value

depositors. During the period full industry was in a big trouble. The subprime crisis has affected

the whole banking industry in England. It also resulted in over purchasing and people bought

over budgeted home. The Northern Rock was not fully focussed on retail savers for generating

deposits. The main deposits base of Northern Rock has come from large value savers and when

the turmoil of subprime crisis started, the Northern Rock faced lots of deposit problem to meet

payments of these large value depositors. It resulted in run on bank and approx 11% of total

deposit base of Northern Rock, was withdrawn in a day.

There were lots of factors responsible for the crisis. The major factors are as follows:

1. There was poor liquidity management in part of Northern Rock.

2. The funding was done on the basis of over credit assessment of borrowers, which

resulted in subprime crisis and frequent defaults.

3. The age group and qualification of the customers.

4. The problem with Managent efficiency.

5. Smooth flow of operations.

6. Information flow from bank to the customers.

The Northern Rock was not having strong operating system and effective communication flow

which resulted in delay for providing effective solution to the problem. The Management was

also not exactly aware about the various small problems which were there the system which has

66


increased day by day and resulted in the form of crisis. The bank has its presence it International

Business wherein documentation and strong flow of information plays a very crucial role. The

Bank also needs a strong system to monitor the working and progress of its branches. It

increased level of risk in Northern Rock.

After the study of various chapter and deep research on the issue, we suggest following

recommendation which would be helpful to come out from the problem and also will reduce the

chances of crisis in the future:

1. The company should focus on increasing its retail deposit base, which will bring stability

in its overall deposit. The retail deposits are also a great source of income because the

cost of retail deposits is much lower than high value deposits, thus it also improves

profitability of the company. The retail deposits also increases company’s customer base

and company does not have to depend on some large value deposits or getting funds from

securitization or from capital market.

2. There should be strong flow of effective information to the management and it needs

systematic and strategic implementation of effective management policies. Since the

company has its presence in international business, it is very important that all problems

to be resolved at the time of their growing stage only. This will not be possible without

implementation of effective business plans and smooth flow of information right from top

to bottom level.

3. The lack of effective regulatory policies was also one of the major factors responsible for

the crisis. There should be adequate regulatory policies to protect interest of company,

depositors, borrowers and share holders. The regulators should also ensure that all

policies are being followed by the company and no deviation should be permitted. There

should be regular and periodic audit be conducted by the regulatory bodies, so that the

problems can be resolved at the initial level only.

67


4. There should be a strong department in the company to take care of liquidity position and

eagle eye on various global issues going on, which can affect company’s business and

profitability. This will ensure better fund management and will also result in improving

profitability of the company.

5. 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 the policies and laws within the company to complement with the

outside provisions of the industry.

The proper and optimum use of available resources is key to success. All employees

should be given work responsibilities according to their potential and skills. This will

ensure better productivity and will also result in improving overall profitability of the

company. The proper resource utilization is also very important to reduce overall costing

and being competitive. (Masciandaro. D, 2003)

The company should prioritize all requirements as per importance and accordingly plan

to fulfil the same. Identifying priorities will ensure that immediate actions are taken and

necessary processes are designed for top priorities, which will be helpful to achieve

company’s goal in the planned manner.

The company should have backup plans to overcome the effect of the various global

issues going on. Since the sub-prime issue is still there, the company should explore

various ways to reduce effect of the issue on the organization. The company should study

various effects of the issue on different banks and should also keep a strong watch on the

68


various plans adopted by other banks to overcome the effect of the issue. This will help

the company to make its plan of action for sub-prime issue. The management should also

keep this on priority and make various policies to reduce or eliminate the effect of sub-

prime issue.

The regulators play a very vital role in financial institutions. Since in a bank or in

a financial institution the company plays with the money of the people, it becomes very

important for regulator to take all necessary actions to protect interest of the depositors,

borrowers, stakeholders etc. We can take example of other countries like India where the

reserve bank of India which is The Central Bank, has very good control on all banks

running in India. Right from giving licence to banks all major policies are made by

Reserve Bank of India and all banks have to adhere these policies. These also ensure

standardization in all the banks of India. The Reserve Bank of India also conducts

periodic audits to see, whether all policies are being followed by the Banks or not and if

finds any irregularity, the immediate action is taken to eliminate further effect of the

issue. The Reserve Bank of India also keeps an eagle eye of various issues going on in the

Indian economy and globally and takes effective measures to protect Indian Banks from

being affected from the issue. Because of RBI’s better control no such issue like sub-

prime is found in Indian Banking system, the same kind of regulation is required in UK

also so that the Banking system can be protected from various internal and external issues

and improve the health of Banks. (Roger, 2009)

Finally after conducting the research and seeing result of the study, we can say that the

sub-prime issue is on very huge level and affecting international financial system. The

Northern Rock is just a very small part of the sub-prime issue. Since the banking is a very

vast industry, it seems too difficult to find out the next effect of the issue or the next

turmoil in the international financial system. It has become very important to resolve the

sub-prime issue at the earliest possible before it becomes out of control. If this issue is not

resolved immediately it can damage the whole banking and international financial

system.

69


It can be best again in the banking industry with some of the efforts related with the

improvement of the operations of the bank. And the support of the bank of England was

the ideal decision not only for the United Kingdom but also for the across the globe. The

decision of the country to convert the bank into nationalization is the great decision to get

the account holders trust back. In the Bank there should be good policies for the

improvement of the bank and there should be appropriate channels for the flow of the

information within the organization and the outside the organization. The Northern Rock

Bank has to put all their wings in the team work to make customers satisfied. If once the

bank will be successful to the get the trust of the customers. Then they will be remain

with the bank and will do support in their tough time. So we could not stop the crisis but

we can get overcome from it.

70


Conclusion:

1. There was poor liquidity management in part of Northern Rock.

2. The funding was done on the basis of over credit assessment of borrowers, which

resulted in subprime crisis and frequent defaults.

3. The age group and qualification of the customers was not considered.

4. The problem with Managent inefficiency was high.

5. Smooth flow of operations was completely negative.

6. Information flow from bank to the customers was not so good.

7. All the problems with management and operations of the bank was analysed and

hence bank came up with the conclusion of the nationalization.

8.

71


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