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 institutiontransformeditselfasajointstockcompanyfromcustomerownedmutual 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
Paraphrase This Document
Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser
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 thelegalfactors.Thebankingoperationsisregulatedbythreemainbodies,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.
Secure Best Marks with AI Grader
Need help grading? Try our AI Grader for instant feedback on your assignments.
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 anotheralthoughthebankingindustrywasheavilyshapedbygovernmentlawsand
Paraphrase This Document
Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser
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.Bankprofitability:Liquidity,capitalandassetquality.JournalofRisk 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. InManagement 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.