Analysis of Northern Rock Crisis

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Outline of Northern Rock Crisis Introduction 1 History 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 and the Rock Building Society. 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 demutualize and float on the stock exchange, to be able to expand their business more easily. Like many other British buildings societies at this time, Northern Rock transformed itself into a bank and mortgage institution. At its Stock Exchange flotation Northern Rock distributed shares to members with savings accounts and mortgage 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. 2 Market Position before the crisis As said before, Northern Rock was originally a building society which demutualized in October 1997 and became a public limited company. This status change marked a radical change in the company’s strategy. From late 1997 to the end of 2006, its consolidated balance sheet increased more than six-fold. Mr Applegarth, the bank’s Chief Executive Officer said that Northern Rock’s assets increased “by 20% plus or minus 5% for the last 17 years” (Treasury Committee Report 2008). In order to sustain high growth in its assets, the bank changed the structure of its liabilities. In 1999, it indeed adopted an “originate and distribute model” whereby the bank originates loans or
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