BLOG: Northern Rock: The Forgotten Harbinger of the Global Financial Crisis

By Bishoy Megalla, Yale University

During the early days of 2007, Northern Rock stood as the fifth-largest bank in the United Kingdom by mortgage assets; with £113.5 billion in assets, the bank had grown tremendously from its origins in the twentieth century as a simple building society. However, by August 2007, as troubles in the wholesale market became apparent, Northern Rock informed the Financial Services Authority (FSA) that the bank had a liquidity issue. On September 14, 2007, a month after notifying the FSA about its funding problems, and after regulators failed to find an acquirer for Northern Rock, the Bank of England (the Bank) announced that it would be bailing out the bank by providing “emergency funding” to keep the bank operational (Hall, 22). At the time, several contemporaries criticized the Bank for its decision, citing Northern Rock’s relative size in the U.K. financial system, the unwillingness of the Bank to provide sufficient liquidity assistance, and the Bank’s perceived inflexibility in providing financing to potential acquirers. Although it ultimately faced several obstacles during its execution, the decision to bail out Northern Rock would prove the best available option by grappling with the systematic reliance on the wholesale market, addressing the spillover effects of the run on Northern Rock, and in working expediently given the legal barriers presented by U.K. law.

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