Founded in 1850, Northern Rock Bank began as a building society before becoming a bank and listing in 1997.
Currently, it is the fifth-largest mortgage lender in the UK, with 1.5 million depositors and providing mortgages to 800,000 homebuyers. Its scale is truly impressive.
In the first half of this year, Northern Rock Bank accounted for 18.9% of all new mortgages issued nationwide, ranking first in the UK.
Unlike other banks, which primarily rely on depositors for funding, Northern Rock Bank, despite becoming a listed bank in 1997, still draws the majority of its funding from financial institutions.
Less than 25% of Northern Rock Bank's funding comes from retail deposits, while over 75% comes from the wholesale market—financing through interbank lending, bond issuance, or the sale of asset-backed securities.
Given the stability of retail deposit funding, Northern Rock, which draws the majority of its funding from the wholesale market, is more susceptible to fluctuations in market supply and demand.
Furthermore, Northern Rock was known for its aggressive lending practices, similar in some ways to those of New Century Financial. It offered loans of up to 100% of the purchase price to homebuyers, exceeding their incomes by five to six times, and sometimes even as much as 125%!
It also lent substantial amounts to buy-to-let investors.
These aggressive measures propelled Northern Rock to the top of the UK in terms of new mortgage lending.
Consequently, when the subprime mortgage crisis swept across the US and global banking caution swept through, many banks
were unsure how much money they had invested in the shaky system. Banks tightened their belts, slowing or halting interbank lending.
Against this backdrop, Northern Rock inevitably faced financing difficulties.
Consequently, when fearful depositors launched a run on the bank,
Northern Rock's cash flow dried up. It's reported that depositors withdrew over £2 billion in deposits in just a few days.
Northern Rock Bank had approximately 1.5 million depositors, who originally held approximately £24 billion in deposits.
However, due to its aggressive lending practices, it was clear that the bank could no longer withstand further bank runs and was forced to seek assistance from the UK's financial regulator and the Bank of England.
Northern Rock even approached DS Group, asking if they could repay their previous mortgages early. Starting with a £4 billion loan secured by pledging some of its O2 shares, DS Group's total loans to the bank exceeded £6.5 billion.
However, these loans all had five-year terms, so DS Group immediately rejected the offer, believing that everyone had to abide by the contract.
This ultimately led to the aforementioned situation. To address the crisis, British Chancellor of the Exchequer Darling announced on September 25th that the British government would provide a guarantee for Northern Rock Bank's depositors.
Darling said, "Depositors can continue to withdraw their money from Northern Rock, but if they choose to keep it with the bank, we will ensure its safety."
He also stated that the Bank of England, the Bank of England's central bank, and the Financial Services Authority would work together to ensure Northern Rock's "normal operations."
Following this news, even more depositors lined up to withdraw their money at Northern Rock.
As lines began to form in front of the bank and television news reports began to appear, the news of "another run on Northern Rock" reached everyone.
Online depositors rushed to withdraw their cash, overwhelming the bank's servers.
As word spread that online customers were unable to withdraw their money, panic intensified. Everyone was worried. When the bank was so destitute that it needed help from the government and the Bank of England, the safest course of action would be to withdraw their deposits.
Currently, Northern Rock Bank's share price has fallen by over 80% from its peak this year!
While Catherine suffered a heavy loss on her 8% stake in Northern Rock, her previous short selling had already made up for it.
DS Holdings, on the other hand, had also profited handsomely from its short selling of Northern Rock Bank.
Ironically, some of the shares they borrowed to short Northern Rock Bank likely came from the Hall family...
But the end was not yet in sight.
After the Bank of England, on behalf of the British government, injected an initial £12 billion into Northern Rock on September 25th, the bank's run intensified instead of easing.
A week later, the Bank of England was forced to inject a second £8 billion, which finally calmed the run.
However, both Northern Rock's shareholders and the British government understood that this was only a temporary fix; restoring investor and depositor confidence was necessary to keep the bank afloat. Otherwise, bankruptcy was the only outcome.
First, everyone was deeply disappointed with Northern Rock's operations. Furthermore, it was difficult to precisely determine the extent of Northern Rock's losses from the subprime mortgage crisis. Therefore, Northern Rock alone could not weather this crisis.
Therefore, the British government's current position is to find a suitable successor for Northern Rock Bank, thereby restructuring the bank and restoring market confidence.
In fact, since the bank run, other banks and institutions have shown interest in the bank.
For example, there are currently over a dozen companies and consortiums, including Virgin Group, a consortium led by the investment company Olivant, and Paul Thompson.
This also includes a consortium formed by Standard Chartered Bank and DS Group.
However, despite the numerous interested institutions and consortiums, reaching a takeover agreement quickly remains difficult.
In addition to negotiating with the bank's board of directors, these institutions and consortiums also require the approval of the bank's largest creditor, the British government.
This is the most difficult part. Remember, when the run on Northern Rock Bank occurred, the British government, through the Bank of England, injected a total of £20 billion into the bank in two installments. Later, to rectify its lending practices, the Bank of England injected another £5 billion…
However, this total of £25 billion wasn't provided free of charge.
The British government's philosophy has always been to exercise minimal intervention in banks—which is why, after the run on Northern Rock Bank and its subsequent appeal for help from the government and the central bank, it took over ten days for them to decide on a bailout.
During this time, the Treasury, the Bank of England, and the Financial Services Authority engaged in intense discussions over whether to bail out Northern Rock. Ultimately, to prevent the situation from spreading further, the decision to inject capital into Northern Rock was finally made.
However, this bailout could not be free, to prevent other banks from making rash business decisions and ultimately leaving the government in a mess. Simply put, Northern Rock's shareholders and management must pay for their mistakes.
Therefore, the 25 billion pounds injected by the Bank of England into Northern Rock was entirely in the form of loans, and interest had to be paid to the government.