Case study Northern Rock

Northern Rock was one of the first banks affected by the global financial crisis where retail customers started a run on the bank, queuing for ATM’s and branches. The bank run itself was mainly a reaction to negative stories in the media, - liquidity challenges already began before, when short-term funding and interbank lending suddenly halted. To tap into new funding options, Northern Rock issued long-term liabilities, such as securitized notes and covered bonds. The real run on the bank began with a structural outflow of wholesale funds when maturing loans were not renewed and deposits withdrawn. Northern Rock received a capital injection from the Bank of England and was later nationalized.

The bank had enough long-term assets but experienced short-term liquidity challenges. The first action of the Bank of England was to guarantee secured deposits. The nationalization split the bank in Northern Rock Asset Management, containing the loans and mortgages, derivatives and several wholesale deposits, and Northern Rock plc, holding the retail and wholesale deposits. The share price of the bank at the moment of nationalization was low and shareholders and bondholders objected due to failure of fair valuation of the share price.

Legal action was taken by shareholders against the UK government, regulators and other stakeholders who influenced the nationalization. The Royal Courts of Justice, Court of Appeal, Commercial Court and the Upper Tribunal ordered on parts of Northern Rock operational procedures.