Economics and Financial Management - Northern Rock Bank

Running head: ECONOMICS AND FINANCIAL MANAGEMENT
ECONOMICS AND FINANCIAL MANAGEMENT
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Executive summary
The paper is a company analysis of an organization that has failed in its operations. The paper
has analyzed about Northern Rock Bank which was a well-established bank in UK. However,
several factors resulted in the loss of the bank which caused bank failure in 2012. The paper uses
several factors that has led to the failure of Northern Rock bank.

Table of Contents
Introduction......................................................................................................................................4
Discussion........................................................................................................................................4
Micro environmental factors........................................................................................................6
Macro environmental factors...........................................................................................................6
Legal Factors...............................................................................................................................7
Social Factors.............................................................................................................................10
Statement of Directors...............................................................................................................10
Conclusion.....................................................................................................................................10
Reference List................................................................................................................................12

Introduction
Businesses perform effectively to get great sales and refrain from organizational failure
the leads to closure of the operation of the firms. Organizations failure is due to several strategic
changes and environmental factors relating to micro environmental and macro environmental
parameters. The aim of the paper is provide a company analysis of an organization that has failed
due several factors (Bace 2016). Northern Rock was a renowned British bank that stopped
operating from 2012 after it went through various crisis. The paper studies about the reasons that
led to organizational failure of Northern Rock Bank.
Discussion
Northern Rock was founded in 1850 which operated as a building society that offered
banking and other financial services such as mortgage lending and saving. By 1997, the
institution transformed itself as a joint stock company from customer owned mutual
organization. It floated through London stock Exchange with a stock symbol with established the
company as a publicly traded company in the stick market. In the early phases of 2000, the
company borrowed huge amounts of money to fund the mortgage and attain huge economic
growth. The company donated large sums of money in charitable organizations in charitable
directly or indirectly through sponsorships (Schifferes and Knowles 2014).
The bank was performed effectively until it went through several crisis during the global
banking crisis of 2007 that lowered the profit margins. It was unable to generate money from its
loans and had problems in repaying the loan amount that has been borrowed by the bank for
banking activities. As a result, the bank resorted to government for supporting its liquidity within
24 hours (Kozmenko and Belova 2015). The bank lost public confidence such that customers
were concerned about its savings and they ran to withdraw their savings amount that was needed

during the crisis period. Unfortunately, the company failed from bank run as customers stopped
using the service leaving to the company in huge losses.The company tried to secure itself with
support from the government or commercial buyer.
Northern Rock was unable to find a commercial buyer that can secure its loss amounts.
As an alternative to public insolvency, Northern Rock was taken by a public ownership company
by the end of 2008 (Goldsmith-Pinkham and Yorulmazer 2014).However, government had
already extended its liquidity in favor of Northern Rock by that time period with a sum of ten
billion pounds. Instead of having several assets, the company was unable to maintain inherent
risks which required restraining the executive directors. The company became very vulnerable
and branch operations were given back to private ownership branches and retail operators (Tooze
2018). Virgin Group acquired the ownership by 2012 and renamed it as Virgin Money, although
the mortgage risks or asset management still remained with the Northern Rock. In 2016,
Northern Rock finally sold its risky assets to Cerberus Capital Management that led to the final
end of Northern North Bank.
Micro environmental factors
The micro environmental factors that affects the business of an organization is related to
the immediate area of operation. They comprise of factors like as consumers, suppliers, market
intermediaries, financing, shareholders and competitors that can affect the performance of
business. Banks are supported by several institutions and government organizations that serves
as the main source of financing the banks. Northern Rock provided huge amounts of loan for
charitable purposes from 2000 that enabled the bank to be a part of FTSE 100 Index that values
100 best companies as per market capitalization. However, Northern Rock Bank could not
maintain its financial obligations due to improper maintenance of high quality and risky assets,

which eventually led to a liquidity crisis by 2007. It was demoted back to FSE 250 in 2007
which enlists the bank under 350 best firms in United Kingdom (Hughes 2016).
Eventually, Northern Rock faced challenges in maintaining the capital assets ratio that is
estimated as the ratio between weighted assets and current liabilities. Banks has two types of
capital, fixed and working capital where fixed capital that is available to the firm and working
capital is the loan amount taken by the banks to undergo the daily operations (Gehrig 2015).
These two capital values are added and divided by the risk weighted assets. Banks must maintain
a low capital adequacy ratio and if value of subordinated debt or working capital is more than
banks run in huge losses.
Macro environmental factors
Macro environmental factors are those demographic economic factors that affects the
performance of the business market such as inflation, GDP and stock market performance. The
micro factors are solely dependent on the macro factors as the banks trade and operate in the
international market as a part of stock exchange market. The bank failed to maintain the capital
adequacy ratio because of global financial crisis (Dungey and Gajurel 2015). The subprime
mortgage crisis happened in 2007, which refers to the period of extreme banking stress that led
to US recession and a collapse of several business. The period was followed by an economic
downturn which led to housing bubble, slow economic growth, high rate of unemployment, fall
in per capita income and recession. The liquidity problem was concentrated and British Labor
Government.
Legal Factors
Laws of a country has a huge impact on the organizational productivity which falls under
the legal factors. The banking operations is regulated by three main bodies, Prudential

Regulatory Authority, the Bank of England (BoE) and Financial Conduct Authority (FCA). The
government solves the problem by nationalizing the banks that shifts private assets into public
assets which comes under the ownership of state or national government. Bank of England
provided liquidity support to Northern Rock band such that it had the eligibility of borrowing
money from the central bank on short term basis during the global financial crisis of 2007 (Saeed
2014). Bids took place but nobody was fully committed for the repayment of tax payers money
and as a result, Northern Rock bank was nationalized by the British Labor Government in 2008.
The company got divided into two parts in 2010 after repetitive losses and news came up that
Virgin Money bought the company in 2012 with 747 dollars after potential payment of 280
million dollars.
Technological Factors
Technology serves as an effective parameter when it comes to banking because banking
services started improving in 1997 with the evolution of banking sector. Banks have to maintain
several ratios like capital adequacy ratio, asset quality, manage the market value of installed
capital, funding cost, banks, capital adequacy, deposits and liquidity (McCormick 2014). The
loan amount went up excessively which divided the firm into two parts in 2010. This can be
effectively understood from the annual report of the company.

Figure 1: Total assets of the company
Source: (Bace 2016)
Figure 2: Total liabilities of the Northern Rock bank as per annual report of 2010
Source: (Bace 2016)

Net assets of the company is the difference between total assets and current liabilities.
Net assets in 2010= 62,631.0-64,958 = -2,648
Figure 3: Total value of statutory profit, underlying profit and net operating income before
taxation in 2010
Source: (Bace 2016)
The bank ran in loss with a value of 400.5 before taxation and the loss amount further increased
to 409.6, leading to overall company failure.
Social Factors
Social factors relates to the change in consumer preference that affects the growth of
businesses. This is dependent on how people use banking options. Consumers want an efficient
banking structure that can manage savings at high rate of return (Akinsoyinu 2015). Northern
Rock was highly affected by the social factor because the bank failure was the result of run

down. Northern Rock Bank had problems to increase money from the money market which
resulted in a loss in consumer trust as they felt they would not be able to get back their savings
account. Depositors lined up to quickly withdraw their savings account and stopped using the
services because everyone was flowing the same trend. Thus, consumers play an important part
in running the businesses because they are the sole users which bring back profit for the
company.
Statement of Directors
The directors were responsible for the preparation of Annual Report and Financial
Statements under company law. They had to select suitable accounting policies that is reasonable
and prudent for accounting measures. They maintained transactions that complies with the
Companies Act 2006. They had the responsibility of safeguarding the assets of the company and
detect fraud or other irregularities with respect to legislation laws of the United Kingdom
(Wilson and Wilson 2016). The directors actively maintained shares, dividends, charitable and
political donations, creditor payment policy, events after the reporting period, creditor payment
policy, auditing and directing indemnities.
Conclusion
Thus, it can be concluded that major cause of failure was the securitization system and
provision of funding through whole sale capital markets. Although the bank has enough assets,
the loss in consumer trust acted as the major problem of Northern Rock bank. The pestle analysis
helped to understand the effectiveness of legal, technological, social, micro environmental and
macro environmental factors that affected business operations. All the factors were related to one
another although the banking industry was heavily shaped by government laws and

macroeconomic factors like the global financial crisis. Rest of which were affected by customer
satisfaction and generation of trust, which ultimately led to the failure of Northern Rock bank.

Reference List
Akinsoyinu, C., 2015. The Great Financial Crisis. International Journal of Finance & Banking
Studies (2147-4486), 4(2), pp.1-10.
Bace, E., 2016. Bank profitability: Liquidity, capital and asset quality. Journal of Risk
Management in Financial Institutions, 9(4), pp.327-331.
Dungey, M. and Gajurel, D., 2015. Contagion and banking crisis–International evidence for
2007–2009. Journal of Banking & Finance, 60, pp.271-283.
Gehrig, T.P., 2015. Changing business models in banking and systemic risk. In Management of
permanent change (pp. 145-160). Springer Gabler, Wiesbaden.
Goldsmith-Pinkham, P. and Yorulmazer, T., 2014. Liquidity, bank runs, and bailouts: spillover
effects during the Northern Rock episode. Journal of Financial Services Research, 37(2-3),
pp.83-98.
Hughes, N., 2016. Ministers Reflect: How to handle a crisis. Institute for Government, p.7.
Kozmenko, S. and Belova, I., 2015. Peculiarities of identification of systemically important
banks and assessment of their impact of the occurrence of economic crisis. Banks and Bank
Systems, 10(3), pp.39-48.
McCormick, R., 2014. Book review: Market-based banking and the international financial crisis,
edited by Iain Hardie and David Howarth. LSE Review of Books.
Saeed, M.S., 2014. Using Loan-to-Deposit Ratio to Avert Liquidity Risk: A Case of 2008
Liquidity Crisis. Research Journal of Finance and Accounting, 5(3), pp.75-80.