Northern Rock was one of those rare things – a commercial institution that was genuinely held in high esteem by its community, and indeed by many further a field. As though to underpin its social service ethos, it began life as a building society; it then morphed into a bank in 1997.
It emerged as one of the top five mortgage lenders in the United Kingdom in terms of gross lending.
A combination of poor decisions around excessive leveraging in relation to its mortgage products – exposed through warranted media exposure and, initially an alleged truculent stance from the Bank of England (then headed by Mervyn King) – led to the bank’s demise.
The run on the bank was the first such event seen in the UK for 150 years at the time, after it approached the BoE for a loan request in relation to money marketing funding and found the loan wasn’t forthcoming; the BoE initially presented an ethical response that stated it disapproved of bailing the bank out.
Liquidity therefore became a major issue for Northern Rock due to its gearing levels, and it became clear that, should it’s debts all be called in at once – an estimated £70 bln in total – it did not have the uncommitted capital in place to cover them.
It’s own small nightmare began, specifically in relation a mortgage product strategy it adopted in the early 2000s; the bank had borrowed significantly to fund mortgages, while proactively pushing for growth.
Within 24 hours of media reports that the bank had approached the UK’s central bank with a bailout request there was a literal rush on the bank, with queues of account holders forming outside branches in an effort to withdraw their life savings – one customer announced she should have listened to her grandmother and kept her savings under the mattress.
The bank’s online withdrawal service had already collapsed and the extraordinary scenes that followed occupied the news airwaves for days.
As a socially conscious entity, Northern Rock had also instigated a programme of annual charitable donations, through its independent charity, the Northern Rock Foundation. This was also put at risk.
Established when Northern Rock Building Society de-mutualised in 1997, up to 2007 the foundation was funded through a covenant – whereby it received 5 pct of the new bank’s pre-tax profits annually; this was in excess of the level of support given by almost any other corporate to a charitable organisation. In total, between 1997 and 2010, the Foundation received £235 million from Northern Rock bank.
Through its grant making it was recognised as one of the most innovative donators to unpopular causes: amongst them sexually exploited adults and children. Its commitment to one geographic region – Newcastle upon Tyne – allowed it to develop long-term programmes and in-depth relationships with voluntary organisations.
Between January 1998 and December 2014 the Foundation awarded £225 mln in 4,400 grants; between January 2015 and January 2016 it made six large awards totalling £10.3 mln, supporting a legacy programme of projects designed to deliver a long term positive impact on the lives of children and young people in the region – and to support the development and sustainability of voluntary organisations.
However, and of course simplistically put, it eventually became apparent that Northern Rock’s pains were just symptomatic of a much bigger financial markets catastrophe, being played out on a global scale; the 2007 credit crisis, catalysed by the global mis-selling of financial vehicles and products, particularly in the form of subprime mortgages; the misuse of credit default swaps (CDS) and the hidden, significant risk, related to the incompetent sale-upon-sale of structured investment vehicles (SIV) – which contained worthless assets – in terms of achieving any returns on them.
Post the credit crisis realisation and so in hindsight, a number of market analysts blamed excessive incentivising by asset management houses towards their fund managers for the mismanagement of complex vehicles and the lack of oversight regarding the sale of packaged non-assets.
Northern Rock executives meanwhile had been accused of being too inward looking and not prepared for any sort of collapse, at least not in the UK market; inexperience in banking, as opposed to building society financing, was levied at the executive.
Eventually, the UK Chancellor of the Exchequer, Alistair Darling, announced the government and the Bank of England would guarantee all deposits held at Northern Rock; the queues outside the bank’s branches subsided. King also announced in an interview on BBC Radio 4, that emergency funding would be available in the range of £20–30bn; ultimately the bailout totalled approximately £15 bln.
However, Northern Rock was unable to secure a commercial buyer or much needed further government support, and was taken into public ownership in 2008 as an alternative to insolvency. Bank branches were eventually bought by Virgin Group in 2012 and rebranded as Virgin Money that year. The mortgage book of higher risk assets were also rebranded and renamed Northern Rock (Asset Management), and later “NRAM Limited”, effectively separating retail and asset management operations.
An inquiry ultimately concluded that the bank board members in position at the time of the crisis – Chairman Matt Ridley and CEO Adam Applegarth – had failed to properly protect the bank from the risks inherent in its strategy, or to restrain the executive directors where required, therefore, although the bank had sufficient assets, it had become vulnerable.
The bank remains in public ownership.