Financial Regulation Assignment Northern Rock Cas

Question 1: The Northern joggle case demonstrates that fiscal regulators should not view modern banking separately from capital market developments.

A) Describe the liquidity spiral at work in the Northern Rock case

Liquidity spirals argon deprivation spirals which start as a result of deprecation of asset measure whereby the net value decreases faster than the gross value (because of their leverage). Assuming a constant leverage ratio, the drop in value of the asset will force the company to each raise more capital (not likely if the market is already tight) or to sell assets at a time when the prices consider already dropped. The selling of the assets will push the prices down that which will inevitably result in more sales.

The financial institutions capital erodes and, at the same time, lending standards and margins tighten. Both make cause ?re-sales, pushing down prices and tightening support horizontal further (Brunnermeier and Pedersen, 2005).

Notwithstanding the fact that Northern Rock was ab initio set up as a regionally ground institution, the Bank had experienced a rapid growth during the go before its crisis mid 2007. Northern Rocks substance assets had grown from 17.4 billion pounds to 113.5 billion pounds by June 2007, making it the fifth largest bank in the UK by mortgage assets.





The mount of these assets caused a dramatic change in the composition of Northern Rocks liabilities. The bank was highly leveraged and strongly relied on non-retail funding ( short-run). The traditional retail funding was mainly replaced by short-term borrowing in the capital market, securitized notes and other form of non-retail funding such as interbank deposits, covered bonds and wholesale funding.

The covered bonds are long-term liabilities (against securitized mortgage assets) and as such they are illiquid. The securitized notes had a medium to long-term maturity (average of over one year). The wholesale funding consisted of a mixture of short and medium...If you want to ascertain a full essay, order it on our website: Orderessay



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