The Northern Rock Story Simplified – Why Did it Happen?

In September of this year the nation's fifth largest mortgage lender became the victim of the first run on a British bank in almost 150 years. Since the credit crunch took hold in the UK in August Northern Rock has become known as one of the highest profile victims of the financial turmoil that was created by the global credit crunch, which was sparked in the sub-prime mortgage sectors of the United States.





According to reports the Treasury first learned that Northern Rock was experiencing financial problems in August of this year, when the Financial Services Authority apparently told the Chancellor of the Exchequer, Alistair Darling, that the bank was in trouble. According to Alistair Darling the FSA and the treasury did their best to help Northern Rock to overcome these problems, forming part of the tripartite system that was created to deal with such issues, the third party being the Bank of England.





By September rumours were rife that Northern Rock had run into financial problems, which were fuelled by various factors including increased inter-bank borrowing fees resulting from the credit crunch. It was soon public knowledge that Northern Rock had taken an emergency loan for billions of pounds from the Bank of England, and this is where widespread panic set in, as the general public found out about the loan and began to panic that the lender was on the verge of collapse.





Within a matter of day, around the middle of September, the share prices for Northern Rock plummeted, losing over 80% of their value at one point. Worried savers queued around the clock to withdraw their savings, with many others trying to use the Internet to withdraw their cash as early on as possible. Customers were withdrawing money from all sorts of accounts, including ISAs, and over the course of several days over two billion pounds in savings was taken out of the bank.





Since this chaos, Northern Rock has had to cope with not only huge financial losses but also a reputation that has been left in tatters. There have been talks of selling some or all of the business, and a number of parties, including Sir Richard Branson, have expressed an interest. The chairman of the bank, Dr Matt Ridley, tendered his resignation following the chaos, although he was asked to stay on a little longer in order to face a grilling from the Treasury Select Committee.





Despite the problems and turmoil that the bank has faced a number of lessons have been learned, although officials state that the full extent of these lessons will not become clear until next year. However, the level of guarantee that the government offers on savings has been raised as a result of the Northern Rock situation, which may decrease the risk of another bank becoming such a high profile victim in the future.