143-633: Northern Rock , formerly the Northern Rock Building Society , was a British bank . Based at Regent Centre in Newcastle upon Tyne , United Kingdom, Northern Rock was originally a building society . It demutualised and became Northern Rock bank in 1997, when it floated on the London Stock Exchange with the ticker symbol NRK. During the early 2000s the company borrowed substantially to fund mortgages, with
286-412: A bank account is considered indispensable by most businesses and individuals. Non-banks that provide payment services such as remittance companies are normally not considered as an adequate substitute for a bank account. Banks issue new money when they make loans. In contemporary banking systems, regulators set a minimum level of reserve funds that banks must hold against the deposit liabilities created by
429-511: A building society to a bank), Northern Rock distributed shares to members with savings accounts and mortgage loans ; the flotation share price was £4.51908. It joined the stock exchange as a minor bank. In 2000, it was promoted to the FTSE 100 Index . After the 2007 crisis, it was demoted to the FTSE 250 in December of that year, before suspension upon nationalisation . On 14 September 2007
572-513: A challenge to the epistemic norms typically assumed within financial economics and all of empirical finance. The possibility of financial crises being beyond the predictive reach of causality is discussed further within Epistemology of finance . Leverage , which means borrowing to finance investments, is frequently cited as a contributor to financial crises. When a financial institution (or an individual) only invests its own money, it can, in
715-478: A committee of volunteers. The UK Shareholders Association provide administrative and advisory oversight to the group. The Committee reached the conclusion that HM Treasury has made a substantial amount of money from running down the loan book of the bank. The NRSAG committee made several failed appeals to the Government previously, but the facts were not fully known then, but it is evident now that all loans to
858-403: A currency of at least 25% but it is also defined as at least a 10% increase in the rate of depreciation. In general, a currency crisis can be defined as a situation when the participants in an exchange market come to recognize that a pegged exchange rate is about to fail, causing speculation against the peg that hastens the failure and forces a devaluation . A speculative bubble (also called
1001-419: A devaluation crisis, is normally considered as part of a financial crisis. Kaminsky et al. (1998), for instance, define currency crises as occurring when a weighted average of monthly percentage depreciations in the exchange rate and monthly percentage declines in exchange reserves exceeds its mean by more than three standard deviations. Frankel and Rose (1996) define a currency crisis as a nominal depreciation of
1144-445: A fee for that service. In exchange for each deposit of precious metal, the goldsmiths issued receipts certifying the quantity and purity of the metal they held as a bailee ; these receipts could not be assigned, only the original depositor could collect the stored goods. Gradually the goldsmiths began to lend money out on behalf of the depositor , and promissory notes , which evolved into banknotes, were issued for money deposited as
1287-399: A few agents encourage others to buy too, not because the true value of the asset increases when many buy (which is called "strategic complementarity"), but because investors come to believe the true asset value is high when they observe others buying. In "herding" models, it is assumed that investors are fully rational, but only have partial information about the economy. In these models, when
1430-445: A few investors buy some type of asset, this reveals that they have some positive information about that asset, which increases the rational incentive of others to buy the asset too. Even though this is a fully rational decision, it may sometimes lead to mistakenly high asset values (implying, eventually, a crash) since the first investors may, by chance, have been mistaken. Herding models, based on Complexity Science , indicate that it
1573-402: A financial bubble or an economic bubble) exists in the event of large, sustained overpricing of some class of assets. One factor that frequently contributes to a bubble is the presence of buyers who purchase an asset based solely on the expectation that they can later resell it at a higher price, rather than calculating the income it will generate in the future. If there is a bubble, there is also
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#17327757013601716-404: A financial crisis. To facilitate his analysis, Minsky defines three approaches that financing firms may choose, according to their tolerance of risk. They are hedge finance, speculative finance, and Ponzi finance. Ponzi finance leads to the most fragility. Financial fragility levels move together with the business cycle . After a recession , firms have lost much financing and choose only hedge,
1859-475: A fixed exchange rate may be stable for a long period of time, but will collapse suddenly in an avalanche of currency sales in response to a sufficient deterioration of government finances or underlying economic conditions. According to some theories, positive feedback implies that the economy can have more than one equilibrium . There may be an equilibrium in which market participants invest heavily in asset markets because they expect assets to be valuable. This
2002-522: A further £73 million deferred consideration was paid by Virgin. In 2014 Virgin Money repaid a further £154.5 million that it had received as part of the refinancing package. The Northern Rock Shareholder Action Group (NRSAG) has been active since the Northern Rock crisis began in 2007, seeking fair compensation for the thousands of small shareholders who owned Northern Rock shares. The group is run by
2145-507: A green support services company, Eaga (now Carillion Energy ), as it was surplus to the bank's requirements at the time. The Kielder and Prudhoe buildings of the Gosforth site were completed in the early 1990s, behind which lies the distinctive glass-fronted Alnwick building. The main Atrium reception is adjacent to this, opening out onto Baker Street , a large covered atrium that housed
2288-425: A large number of small to medium-sized institutions in its banking system. As of November 2009, China's top four banks have in excess of 67,000 branches ( ICBC :18000+, BOC :12000+, CCB :13000+, ABC :24000+) with an additional 140 smaller banks with an undetermined number of branches. Japan had 129 banks and 12,000 branches. In 2004, Germany, France, and Italy each had more than 30,000 branches – more than double
2431-417: A loan to the goldsmith. Thus, by the 19th century, we find in ordinary cases of deposits, of money with banking corporations, or bankers, the transaction amounts to a mere loan, or mutuum , and the bank is to restore, not the same money, but an equivalent sum, whenever it is demanded and money, when paid into a bank, ceases altogether to be the money of the principal (see Parker v. Marchant, 1 Phillips 360); it
2574-479: A mutual society were built up by its members throughout its history, not just by current members, and that demutualisation was a betrayal of the community that the societies were created to serve. Northern Rock chose to address these concerns by establishing the Northern Rock Foundation, which funded community-based projects. At its Stock Exchange flotation on 1 October 1997 (when it converted from
2717-535: A portion of their current liabilities. In addition to other regulations intended to ensure liquidity , banks are generally subject to minimum capital requirements based on an international set of capital standards, the Basel Accords . Banking in its modern sense evolved in the fourteenth century in the prosperous cities of Renaissance Italy but, in many ways, functioned as a continuation of ideas and concepts of credit and lending that had their roots in
2860-496: A process known as securitisation . In 2007, there was much press attention given to the growing crisis due to subprime mortgage lending, particularly in the United States. Amid the resultant unease by August 2007, global demand from investors for securitised mortgages had fallen away, and Northern Rock was unable to raise funding by selling its securitised loan books, and therefore became unable to repay short-term loans from
3003-404: A public lack of confidence and concerns that savings were at risk, and the bank failed following a bank run as people rushed to withdraw their savings. It was the first British bank in 150 years to fail due to a bank run. Unable to find a commercial buyer or secure the further government support needed, it was taken into public ownership in 2008, as an alternative to insolvency . By that point
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#17327757013603146-692: A restaurant, shop and on-site branch. A number of other buildings, all named after North-Eastern castles are joined to Baker Street . A sub-division in Guernsey was established in February 1996, handling offshore savings and investment accounts. The Guernsey business was shut down on 2 September 2010. Northern Rock opened a branch in Ireland on 16 November 1999 and the first branch in Northern Ireland followed on 4 April 2007. The first branch of
3289-701: A risk of sovereign default due to fluctuations in exchange rates. Many analyses of financial crises emphasize the role of investment mistakes caused by lack of knowledge or the imperfections of human reasoning. Behavioural finance studies errors in economic and quantitative reasoning. Psychologist Torbjorn K A Eliazon has also analyzed failures of economic reasoning in his concept of 'œcopathy'. Historians, notably Charles P. Kindleberger , have pointed out that crises often follow soon after major financial or technical innovations that present investors with new types of financial opportunities, which he called "displacements" of investors' expectations. Early examples include
3432-490: A risk of a crash in asset prices: market participants will go on buying only as long as they expect others to buy, and when many decide to sell the price will fall. However, it is difficult to predict whether an asset's price actually equals its fundamental value, so it is hard to detect bubbles reliably. Some economists insist that bubbles never or almost never occur. Well-known examples of bubbles (or purported bubbles) and crashes in stock prices and other asset prices include
3575-538: A run renders the bank insolvent, causing customers to lose their deposits, to the extent that they are not covered by deposit insurance. An event in which bank runs are widespread is called a systemic banking crisis or banking panic . Examples of bank runs include the run on the Bank of the United States in 1931 and the run on Northern Rock in 2007. Banking crises generally occur after periods of risky lending and resulting loan defaults. A currency crisis, also called
3718-416: A safe and convenient form of money backed by the goldsmith's promise to pay, allowing goldsmiths to advance loans with little risk of default . Thus the goldsmiths of London became the forerunners of banking by creating new money based on credit. The Bank of England originated the permanent issue of banknotes in 1695. The Royal Bank of Scotland established the first overdraft facility in 1728. By
3861-506: A sizable surplus in the years after nationalisation, even though any and all Government assistance was completely reimbursed in those years, including interest paid at penal rates at no expense to the UK public. The NRSAG asked the Government to review their original compensation decision, given that the updated and widely confirmed numbers prove a huge surplus. To request an appeal, the NRSAG wrote to
4004-428: A small profit could be made with little or no capital. However, when interest rates changed and the incentive for the flow was removed or reversed sudden changes in capital flows could occur. The subjects of investment might be starved of cash possibly becoming insolvent and creating a credit crunch and the loaning banks would be left with defaulting investors leading to a banking crisis. As Charles Read has pointed out,
4147-399: A variety of different ways including interest, transaction fees and financial advice. Traditionally, the most significant method is via charging interest on the capital it lends out to customers. The bank profits from the difference between the level of interest it pays for deposits and other sources of funds, and the level of interest it charges in its lending activities. This difference
4290-557: Is Berenberg Bank (founded in 1590). Banking as an archaic activity (or quasi-banking ) is thought to have begun as early as the end of the 4th millennium BCE, to the 3rd millennia BCE. The present era of banking can be traced to medieval and early Renaissance Italy, to the rich cities in the centre and north like Florence , Lucca , Siena , Venice and Genoa . The Bardi and Peruzzi families dominated banking in 14th-century Florence, establishing branches in many other parts of Europe. Giovanni di Bicci de' Medici set up one of
4433-446: Is a bank regulation , which sets a framework within which a bank or depository institution must manage its balance sheet . The categorisation of assets and capital is highly standardised so that it can be risk weighted . After the financial crisis of 2007–2008 , regulators force banks to issue Contingent convertible bonds (CoCos). These are hybrid capital securities that absorb losses in accordance with their contractual terms when
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4576-400: Is a Bills of Exchange Act that codifies the law in relation to negotiable instruments , including cheques, and this Act contains a statutory definition of the term banker : banker includes a body of persons, whether incorporated or not, who carry on the business of banking' (Section 2, Interpretation). Although this definition seems circular, it is actually functional, because it ensures that
4719-403: Is a list of the largest deals in history in terms of value with participation from at least one bank: Currently, commercial banks are regulated in most jurisdictions by government entities and require a special bank license to operate. Usually, the definition of the business of banking for the purposes of regulation is extended to include acceptance of deposits, even if they are not repayable to
4862-613: Is based on the work of Thomas Tooke , Thomas Attwood , Henry Thornton , William Jevons and a number of bankers opposed to the Bank Charter Act 1844 . Starting at a time when short-term interest rates are low, frustration builds up among investors who search for a better yield in countries and locations with higher rates, leading to increased capital flows to countries with higher rates. Internally, short-term rates rise above long-term rates causing failures where borrowing at short term rates has been used to invest long-term where
5005-459: Is called a currency crisis or balance of payments crisis . When a country fails to pay back its sovereign debt , this is called a sovereign default . While devaluation and default could both be voluntary decisions of the government, they are often perceived to be the involuntary results of a change in investor sentiment that leads to a sudden stop in capital inflows or a sudden increase in capital flight . Several currencies that formed part of
5148-528: Is called a recession . An especially prolonged or severe recession may be called a depression , while a long period of slow but not necessarily negative growth is sometimes called economic stagnation . Some economists argue that many recessions have been caused in large part by financial crises. One important example is the Great Depression , which was preceded in many countries by bank runs and stock market crashes. The subprime mortgage crisis and
5291-426: Is little consensus and financial crises continue to occur from time to time. It is apparent however that a consistent feature of both economic (and other applied finance disciplines) is the obvious inability to predict and avert financial crises. This realization raises the question as to what is known and also capable of being known (i.e. the epistemology ) within economics and applied finance. It has been argued that
5434-509: Is making sure institutions have sufficient assets to meet their contractual obligations, through reserve requirements , capital requirements , and other limits on leverage . Some financial crises have been blamed on insufficient regulation, and have led to changes in regulation in order to avoid a repeat. For example, the former Managing Director of the International Monetary Fund , Dominique Strauss-Kahn , has blamed
5577-431: Is referred to as the spread between the cost of funds and the loan interest rate. Historically, profitability from lending activities has been cyclical and dependent on the needs and strengths of loan customers and the stage of the economic cycle . Fees and financial advice constitute a more stable revenue stream and banks have therefore placed more emphasis on these revenue lines to smooth their financial performance. In
5720-501: Is scarce, potentially aggravating a financial crisis. International regulatory convergence has been interpreted in terms of regulatory herding, deepening market herding (discussed above) and so increasing systemic risk. From this perspective, maintaining diverse regulatory regimes would be a safeguard. Fraud has played a role in the collapse of some financial institutions, when companies have attracted depositors with misleading claims about their investment strategies, or have embezzled
5863-571: Is taxed by government and returned to the mass of people in the form of welfare, family benefits and health and education spending; and secondly, the proportion of the population who are workers rather than investors/business owners. Given the extraordinary capital expenditure required to enter modern economic sectors like airline transport, the military industry, or chemical production, these sectors are extremely difficult for new businesses to enter and are being concentrated in fewer and fewer hands. Empirical and econometric research continues especially in
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6006-461: Is the internal structure of the market, not external influences, which is primarily responsible for crashes. In "adaptive learning" or "adaptive expectations" models, investors are assumed to be imperfectly rational, basing their reasoning only on recent experience. In such models, if the price of a given asset rises for some period of time, investors may begin to believe that its price always rises, which increases their tendency to buy and thus drives
6149-658: Is the type of argument underlying Diamond and Dybvig's model of bank runs , in which savers withdraw their assets from the bank because they expect others to withdraw too. Likewise, in Obstfeld's model of currency crises , when economic conditions are neither too bad nor too good, there are two possible outcomes: speculators may or may not decide to attack the currency depending on what they expect other speculators to do. A variety of models have been developed in which asset values may spiral excessively up or down as investors learn from each other. In these models, asset purchases by
6292-477: Is then the money of the banker, who is bound to return an equivalent, by paying a similar sum to that deposited with him, when he is asked for it. The goldsmith paid interest on deposits. Since the promissory notes were payable on demand, and the advances (loans) to the goldsmith's customers were repayable over a longer time-period, this was an early form of fractional reserve banking . The promissory notes developed into an assignable instrument which could circulate as
6435-626: The European Exchange Rate Mechanism suffered crises in 1992–93 and were forced to devalue or withdraw from the mechanism. Another round of currency crises took place in Asia in 1997–98 . Many Latin American countries defaulted on their debt in the early 1980s. The 1998 Russian financial crisis resulted in a devaluation of the ruble and default on Russian government bonds. Negative GDP growth lasting two or more quarters
6578-742: The Federal Deposit Insurance Corporation (FDIC) as a regulator. However, for soundness examinations (i.e., whether a bank is operating in a sound manner), the Federal Reserve is the primary federal regulator for Fed-member state banks; the Office of the Comptroller of the Currency (OCC) is the primary federal regulator for national banks. State non-member banks are examined by the state agencies as well as
6721-522: The Great Depression , the U.S. Savings and Loan crisis in the 1980s and early 1990s, the Japanese banking crisis during the 1990s, and the sub-prime mortgage crisis in the 2000s. The 2023 global banking crisis is the latest of these crises: In March 2023, liquidity shortages and bank insolvencies led to three bank failures in the United States , and within two weeks, several of the world's largest banks failed or were shut down by regulators Assets of
6864-569: The Renaissance by Florentine bankers, who used to make their transactions atop desks covered by green tablecloths. The definition of a bank varies from country to country. See the relevant country pages for more information. Under English common law , a banker is defined as a person who carries on the business of banking by conducting current accounts for their customers, paying cheques drawn on them and also collecting cheques for their customers. In most common law jurisdictions there
7007-519: The South Sea Bubble and Mississippi Bubble of 1720, which occurred when the notion of investment in shares of company stock was itself new and unfamiliar, and the Crash of 1929 , which followed the introduction of new electrical and transportation technologies. More recently, many financial crises followed changes in the investment environment brought about by financial deregulation , and
7150-735: The ancient world . In the history of banking , a number of banking dynasties – notably, the Medicis , the Pazzi , the Fuggers , the Welsers , the Berenbergs , and the Rothschilds – have played a central role over many centuries. The oldest existing retail bank is Banca Monte dei Paschi di Siena (founded in 1472), while the oldest existing merchant bank
7293-433: The bursting of other financial bubbles , currency crises , and sovereign defaults . Financial crises directly result in a loss of paper wealth but do not necessarily result in significant changes in the real economy (for example, the crisis resulting from the famous tulip mania bubble in the 17th century). Many economists have offered theories about how financial crises develop and how they could be prevented. There
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#17327757013607436-712: The financial crisis of 2007–2008 on 'regulatory failure to guard against excessive risk-taking in the financial system, especially in the US'. Likewise, the New York Times singled out the deregulation of credit default swaps as a cause of the crisis. However, excessive regulation has also been cited as a possible cause of financial crises. In particular, the Basel II Accord has been criticized for requiring banks to increase their capital when risks rise, which might cause them to decrease lending precisely when capital
7579-478: The stock market (" margin buying ") became increasingly common prior to the Wall Street Crash of 1929 . Another factor believed to contribute to financial crises is asset-liability mismatch , a situation in which the risks associated with an institution's debts and assets are not appropriately aligned. For example, commercial banks offer deposit accounts that can be withdrawn at any time, and they use
7722-422: The world systems theory and in the debate about Nikolai Kondratiev and the so-called 50-years Kondratiev waves . Major figures of world systems theory, like Andre Gunder Frank and Immanuel Wallerstein , consistently warned about the crash that the world economy is now facing. World systems scholars and Kondratiev cycle researchers always implied that Washington Consensus oriented economists never understood
7865-481: The 15,000 branches in the United Kingdom. Between 1985 and 2018 banks engaged in around 28,798 mergers or acquisitions, either as the acquirer or the target company. The overall known value of these deals cumulates to around 5,169 bil. USD. In terms of value, there have been two major waves (1999 and 2007) which both peaked at around 460 bil. USD followed by a steep decline (−82% from 2007 until 2018). Here
8008-614: The 17th century Dutch tulip mania , the 18th century South Sea Bubble , the Wall Street Crash of 1929 , the Japanese property bubble of the 1980s, and the crash of the United States housing bubble during 2006–2008. The 2000s sparked a real estate bubble where housing prices were increasing significantly as an asset good. When a country that maintains a fixed exchange rate is suddenly forced to devalue its currency due to accruing an unsustainable current account deficit, this
8151-534: The 1990s. Notably, Dave Jones, the Group Finance Director through the crisis, had only been in his role since the retirement of Bob Bennett in January 2007. Alongside Applegarth, Bennett had been one of the architects of the bank's flotation in 1997 and its subsequent substantial growth. He had been wary of its continued aggressive growth strategy, which would continue up until summer 2007, despite
8294-499: The 2000s, which saw the development some new buildings as well as the demolition of their original 1960s tower block during Spring 2006. A new tower block, simply known as The Tower , was completed in November 2008, originally intended to create 1500 jobs, and act as the main entrance and focal point of the company headquarters. The local council, Newcastle City Council , purchased the building for £22 million, and leased it to
8437-491: The 2008 subprime mortgage crisis ; government officials stated on 23 September 2008 that the FBI was looking into possible fraud by mortgage financing companies Fannie Mae and Freddie Mac , Lehman Brothers , and insurer American International Group . Likewise it has been argued that many financial companies failed in the recent crisis because their managers failed to carry out their fiduciary duties. Contagion refers to
8580-464: The Bank of England, to replace funds it was unable to raise from the money market. Reporting of this complex scenario led to panic among individual depositors, who feared that their savings might not be available should Northern Rock go into receivership. The result was a bank run – the UK's first in 150 years – where depositors lined up outside the bank to withdraw all of their savings as quickly as possible, particularly since many other people were doing
8723-531: The British courts, but hoped to take the case to the European courts. However, on 8 December 2009, it was announced that the valuer Andrew Caldwell had decided that the Northern Rock shareholders should get no compensation. On 23 February 2009, Northern Rock announced that they would be offering £14 billion worth of new mortgages, over the next two years, as a part of their new business plan. This new lending
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#17327757013608866-529: The FDIC. National banks have one primary regulator – the OCC. Each regulatory agency has its own set of rules and regulations to which banks and thrifts must adhere. The Federal Financial Institutions Examination Council (FFIEC) was established in 1979 as a formal inter-agency body empowered to prescribe uniform principles, standards, and report forms for the federal examination of financial institutions. Although
9009-619: The FFIEC has resulted in a greater degree of regulatory consistency between the agencies, the rules and regulations are constantly changing. Financial Crises Heterodox A financial crisis is any of a broad variety of situations in which some financial assets suddenly lose a large part of their nominal value. In the 19th and early 20th centuries, many financial crises were associated with banking panics , and many recessions coincided with these panics. Other situations that are often called financial crises include stock market crashes and
9152-507: The Government effectively took ownership of the insolvent institution away from its shareholders, without reimbursement. The media reported cases where some shareholders had their life savings in the shares, which were taken from them. The shares had already lost over 90% of their value prior to nationalisation, and were valued at nil in an independent valuation process, as the government had not guaranteed aid. This would later form part of shareholder's action to seek compensation as, at that point,
9295-589: The NR 'blocks' inline with the main company, using the same new typeface. The Red Box Design Group designed all the currently standing buildings at the company's headquarters in Gosforth and have contributed to many of the other design aspects of the company, such as the in-branch styling. From 1 October 1997 until the government nationalisation, the bank used the symbol NRK on the London Stock Exchange. One of Northern Rock's final advertising campaigns before
9438-657: The Treasury Select Committee. Also, the group wrote to each MP to back their campaign for fairness and justice. Northern Rock has been one of the top five mortgage lenders in the United Kingdom in terms of gross lending according to Council of Mortgage Lenders statistics. As well as mortgages, the bank also deals with savings accounts and insurance. Home and contents insurance was dealt with by AXA whilst Legal & General , whose mortgage book Northern Rock acquired, arranged life insurance investments. The bank offered credit cards until 2003, when it sold
9581-538: The UK, for example, the Financial Services Authority licenses banks, and some commercial banks (such as the Bank of Scotland ) issue their own banknotes in addition to those issued by the Bank of England , the UK government's central bank. Banking law is based on a contractual analysis of the relationship between the bank (defined above) and the customer – defined as any entity for which
9724-415: The actual risks in the economy and stop giving credit so easily. Refinancing becomes impossible for many, and more firms default. If no new money comes into the economy to allow the refinancing process, a real economic crisis begins. During the recession, firms start to hedge again, and the cycle is closed. The Banking School theory of crises describes a continuous cycle driven by varying interest rates. It
9867-453: The aid was certain and the company had never stopped operating as a going concern. A substantial reduction in the staff was announced in 2008, with 800 people made compulsorily redundant in July of that year, and another 500 taking voluntary redundancy. The bank planned to make another 700 redundant by 2011. On 1 January 2010 the bank was split into two parts, assets and banking. In June 2011
10010-436: The aim of ambitious growth, and also donated large amounts to charitable purposes and communities directly and through sponsorships. The global banking crisis beginning around 2007–08 meant that it was unable to produce income as expected from its loans, and was at risk of being unable to repay the amounts it had borrowed. The news that the bank had approached the government for support with its liquidity led within 24 hours to
10153-476: The assumptions of unique, well-defined causal chains being present in economic thinking, models and data, could, in part, explain why financial crises are often inherent and unavoidable. When a bank suffers a sudden rush of withdrawals by depositors, this is called a bank run . Since banks lend out most of the cash they receive in deposits (see fractional-reserve banking ), it is difficult for them to quickly pay back all deposits if these are suddenly demanded, so
10296-639: The bank agrees to conduct an account. The law implies rights and obligations into this relationship as follows: These implied contractual terms may be modified by express agreement between the customer and the bank. The statutes and regulations in force within a particular jurisdiction may also modify the above terms or create new rights, obligations, or limitations relevant to the bank-customer relationship. Some types of financial institutions, such as building societies and credit unions , may be partly or wholly exempt from bank license requirements, and therefore regulated under separate rules. The requirements for
10439-492: The bank included Virgin Money , National Australia Bank , NBNK , Santander , Blackstone , Tesco , TowerBrook , Yorkshire Building Society and Coventry Building Society . Former Chancellor of the Exchequer Alistair Darling had stated that he was in no "hurry" to return the bank to the private sector. The bank was split into two parts, assets and banking on 1 January 2010. On 15 June 2011, it
10582-548: The bank opened in Denmark on 7 February 2007; however as part of the Government restructuring, the Danish operations ceased on 18 June 2008. The €650 million worth of Irish deposits were sold to Permanent TSB in 2011. In 2000 Northern Rock introduced a new corporate identity consisting of a magenta square containing the company name. This replaced the NR 'blocks' logo. The Northern Rock Foundation also changed its logo in 2003 from
10725-407: The bank sought and received a liquidity support facility from the Bank of England , following problems in the credit markets caused by the 2007–2008 financial crisis . The bank was more exposed than others to restrictions in the supply of credit because of the way it had funded its expansion. It had borrowed short term on the wholesale money markets and lent long term for mortgages on property. This
10868-489: The bank was officially put up for sale back to the private sector, and on 17 November 2011 it was announced that Virgin Money was going to buy Northern Rock plc for £747 million up front and other potential payments of up to £280 million over the next few years. The sale went through on 1 January 2012. The government said it had no plans to sell Northern Rock (Asset Management) and there would be no further job losses, except for those already announced. Virgin also pledged to keep
11011-415: The bank was repaying the loan well ahead of target, owing a net balance of only £8.9 billion of the loan which stood at £26.9 billion at the end of 2007. By October, customers appeared to be regaining confidence in the bank, when it emerged that there had been a surge in the number of new accounts which had been opened. People perceived Northern Rock as a safe place to put their money, given that it
11154-518: The bank was taken into state ownership as a result of two unsuccessful bids to take over the bank, neither being able to fully commit to repayment of taxpayers' money within three years. The bank was managed at " arm's length " by the government through UK Financial Investments . The bank planned to repay the government debt within three to four years, primarily by encouraging mortgage customers to take their mortgage to another lender. Costs were also reduced by reducing numbers of staff. As of 3 March 2009,
11297-411: The bank will not repay it), and interest rate risk (the possibility that the bank will become unprofitable, if rising interest rates force it to pay relatively more on its deposits than it receives on its loans). Banking crises have developed many times throughout history when one or more risks have emerged for the banking sector as a whole. Prominent examples include the bank run that occurred during
11440-667: The bank, and collecting cheques deposited to customers' current accounts. Banks also enable customer payments via other payment methods such as Automated Clearing House (ACH), Wire transfers or telegraphic transfer , EFTPOS , and automated teller machines (ATMs). Banks borrow money by accepting funds deposited on current accounts, by accepting term deposits , and by issuing debt securities such as banknotes and bonds . Banks lend money by making advances to customers on current accounts, by making installment loans , and by investing in marketable debt securities and other forms of money lending. Banks provide different payment services, and
11583-662: The beginning of the 19th century Lubbock's Bank had established a bankers' clearing house in London to allow multiple banks to clear transactions. The Rothschilds pioneered international finance on a large scale, financing the purchase of shares in the Suez canal for the British government in 1875. The word bank was taken into Middle English from Middle French banque , from Old Italian banco , meaning "table", from Old High German banc, bank "bench, counter". Benches were used as makeshift desks or exchange counters during
11726-404: The bonuses would enable them to retain critical staff members at risk of being poached by other companies. It had previously been criticised in 1998 when the pay of the executive team that led the flotation was 40% higher in the year following. In late 2007, Virgin Money was named as the preferred bidder for the group, with Olivant Group later beginning talks around takeover. On 22 February 2008,
11869-600: The branches and other retail operations were acquired by Virgin Group in 2012, being rebranded as Virgin Money the same year. The mortgage book of higher risk assets was renamed Northern Rock (Asset Management) and later " NRAM plc ", and remained in public ownership until it was sold to Cerberus Capital Management in 2016. As of May 2024 the Northern Rock Shareholder Action Group are continuing their campaign to obtain compensation for
12012-468: The bursting of other real estate bubbles around the world also led to recession in the U.S. and a number of other countries in late 2008 and 2009. Some economists argue that financial crises are caused by recessions instead of the other way around, and that even where a financial crisis is the initial shock that sets off a recession, other factors may be more important in prolonging the recession. In particular, Milton Friedman and Anna Schwartz argued that
12155-515: The business of banking for the purposes of the legislation, and not necessarily in general. In particular, most of the definitions are from legislation that has the purpose of regulating and supervising banks rather than regulating the actual business of banking. However, in many cases, the statutory definition closely mirrors the common law one. Examples of statutory definitions: Since the advent of EFTPOS (Electronic Funds Transfer at Point Of Sale), direct credit, direct debit and internet banking ,
12298-418: The business to The Co-operative Bank in order to free capital for its rapid growth in mortgage lending, making a profit of more than £7 million. Northern Rock continued to sell credit cards under its own brand through The Co-operative Bank until November 2007; the decision to stop was made before the 2007 crisis. In 2006 the bank had moved into sub-prime lending via a deal with Lehman Brothers . Although
12441-414: The business to Nationwide in 4 years. After 27 years the business is once again a mutual. Under non-executive chairman Matt Ridley and Chief Executive Adam Applegarth , Northern Rock had a business plan which involved borrowing heavily in the UK and international money markets, extending mortgages to customers based on this funding, and then re-selling these mortgages on international capital markets, in
12584-533: The capital of the issuing bank falls below a certain level. Then debt is reduced and bank capitalisation gets a boost. Owing to their capacity to absorb losses, CoCos have the potential to satisfy regulatory capital requirement. The economic functions of banks include: Banks are susceptible to many forms of risk which have triggered occasional systemic crises. These include liquidity risk (where many depositors may request withdrawals in excess of available funds), credit risk (the chance that those who owe money to
12727-483: The cheque has lost its primacy in most banking systems as a payment instrument. This has led legal theorists to suggest that the cheque based definition should be broadened to include financial institutions that conduct current accounts for customers and enable customers to pay and be paid by third parties, even if they do not pay and collect cheques . Banks act as payment agents by conducting checking or current accounts for customers, paying cheques drawn by customers in
12870-486: The chief executive, were made internally. At the time of the 2007 financial crisis Matt Ridley was the chairman and Adam Applegarth was the chief executive. Ridley resigned in October 2007 and Applegarth resigned in November 2007, although the latter stayed on in a caretaker role until December 2007. The chief financial officer was Andy Kuipers, who joined the company in 1987. After Applegarth's departure, Kuipers became
13013-628: The circular relationships often evident in social systems between cause and effect – and relates to the property of self-referencing in financial markets. George Soros has been a proponent of the reflexivity paradigm surrounding financial crises. Similarly, John Maynard Keynes compared financial markets to a beauty contest game in which each participant tries to predict which model other participants will consider most beautiful. Furthermore, in many cases, investors have incentives to coordinate their choices. For example, someone who thinks other investors want to heavily buy Japanese yen may expect
13156-416: The crash of the dot com bubble in 2001 arguably began with "irrational exuberance" about Internet technology. Unfamiliarity with recent technical and financial innovations may help explain how investors sometimes grossly overestimate asset values. Also, if the first investors in a new class of assets (for example, stock in "dot com" companies) profit from rising asset values as other investors learn about
13299-423: The cross-selling of complementary products. Banks face a number of risks in order to conduct their business, and how well these risks are managed and understood is a key driver behind profitability, and how much capital a bank is required to hold. Bank capital consists principally of equity , retained earnings and subordinated debt . Some of the main risks faced by banks include: The capital requirement
13442-408: The customer's order – although money lending, by itself, is generally not included in the definition. Unlike most other regulated industries, the regulator is typically also a participant in the market, being either publicly or privately governed central bank . Central banks also typically have a monopoly on the business of issuing banknotes . However, in some countries, this is not the case. In
13585-448: The cycle restarts from the beginning. Mathematical approaches to modeling financial crises have emphasized that there is often positive feedback between market participants' decisions (see strategic complementarity ). Positive feedback implies that there may be dramatic changes in asset values in response to small changes in economic fundamentals. For example, some models of currency crises (including that of Paul Krugman ) imply that
13728-413: The dangers and perils, which leading industrial nations will be facing and are now facing at the end of the long economic cycle which began after the oil crisis of 1973. Hyman Minsky has proposed a post-Keynesian explanation that is most applicable to a closed economy. He theorized that financial fragility is a typical feature of any capitalist economy . High fragility leads to a higher risk of
13871-552: The economy. These theoretical ideas include the ' financial accelerator ', ' flight to quality ' and ' flight to liquidity ', and the Kiyotaki-Moore model . Some 'third generation' models of currency crises explore how currency crises and banking crises together can cause recessions. Austrian School economists Ludwig von Mises and Friedrich Hayek discussed the business cycle starting with Mises' Theory of Money and Credit , published in 1912. Recurrent major depressions in
14014-460: The following 30 years, Northern Rock expanded through the acquisition of 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 demutualise as a building society and float on the stock exchange as a bank. Throughout this period an argument against demutualisation was that the assets of
14157-408: The form of wages) than the value of the goods produced by those workers (i.e. the amount of money the products are sold for). This profit first goes towards covering the initial investment in the business. In the long-run, however, when one considers the combined economic activity of all successfully-operating business, it is clear that less money (in the form of wages) is being returned to the mass of
14300-589: The funding of these loans, in order to ensure that the banks can meet demands for payment of such deposits. These reserves can be acquired through the acceptance of new deposits, sale of other assets, or borrowing from other banks including the central bank. Activities undertaken by banks include personal banking , corporate banking , investment banking , private banking , transaction banking , insurance , consumer finance , trade finance and other related. Banks offer many different channels to access their banking and other services: A bank can generate revenue in
14443-511: The funds cannot be liquidated quickly (a similar mechanism was implicated in the March 2023 failure of SVB Bank ). Internationally, arbitrage and the need to stop capital flows, which caused bullion drains in the gold standard of the nineteenth century and drains of foreign capital later, bring interest rates in the low-rate country up to equal those in the country which is the subject of investment. The capital flows reverse or cease suddenly causing
14586-417: The government had extended liquidity support of tens of billions of pounds to Northern Rock. An inquiry concluded that the board had failed to properly protect the bank from the risks inherent in its strategy, or to restrain the executive directors where required, therefore although the bank had sufficient assets, it had become vulnerable. The branch operations were eventually returned to private ownership when
14729-616: The headquarters of the bank in Newcastle upon Tyne. The combined business now operates under the Virgin Money brand. On 12 October 2012 Northern Rock plc was renamed Virgin Money plc, and Virgin Money Limited was renamed Northern Rock Limited. By this time the Northern Rock website had effectively become a ' soft redirect ' to Virgin Money's website. In 2024, Nationwide Building Society bought Virgin Money, and aims to rebrand
14872-442: The idea that financial crises may spread from one institution to another, as when a bank run spreads from a few banks to many others, or from one country to another, as when currency crises, sovereign defaults, or stock market crashes spread across countries. When the failure of one particular financial institution threatens the stability of many other institutions, this is called systemic risk . One widely cited example of contagion
15015-612: The increasing volatility in the markets on which Northern Rock relied. Commentators later suggested that with Bennett's retirement, the executive board was dominated by Applegarth. A report by the Financial Services Authority conceded in February 2008 that it had been wrong to consider Northern Rock low risk, and as a result had given the company too little scrutiny. The group was criticised when it emerged that they had begun to pay in excess of 150 senior staff members substantial retention bonuses. Northern Rock hoped
15158-506: The initial economic decline associated with the crash of 1929 and the bank panics of the 1930s would not have turned into a prolonged depression if it had not been reinforced by monetary policy mistakes on the part of the Federal Reserve, a position supported by Ben Bernanke . It is often observed that successful investment requires each investor in a financial market to guess what other investors will do. Reflexivity refers to
15301-504: The innovation (in our example, as others learn about the potential of the Internet), then still more others may follow their example, driving the price even higher as they rush to buy in hopes of similar profits. If such " herd behaviour " causes prices to spiral up far above the true value of the assets, a crash may become inevitable. If for any reason the price briefly falls, so that investors realize that further gains are not assured, then
15444-427: The interim chief executive prior to the nationalisation before retiring on 31 August 2008. In February 2008, Ron Sandler was appointed executive chairman by the government. Gary Hoffman became chief executive of Northern Rock in October 2008. With the appointment of Gary Hoffman, Ron Sandler changed to a non-executive chairman position. Bank A bank is a financial institution that accepts deposits from
15587-442: The issue of a bank license vary between jurisdictions but typically include: Banks' activities can be divided into: Most banks are profit-making, private enterprises. However, some are owned by the government, or are non-profit organisations . The United States banking industry is one of the most heavily regulated and guarded in the world, with multiple specialised and focused regulators. All banks with FDIC-insured deposits have
15730-409: The largest 1,000 banks in the world grew by 6.8% in the 2008–2009 financial year to a record US$ 96.4 trillion while profits declined by 85% to US$ 115 billion. Growth in assets in adverse market conditions was largely a result of recapitalisation. EU banks held the largest share of the total, 56% in 2008–2009, down from 61% in the previous year. Asian banks' share increased from 12% to 14% during
15873-450: The legal basis for bank transactions such as cheques does not depend on how the bank is structured or regulated. The business of banking is in many common law countries not defined by statute but by common law, the definition above. In other English common law jurisdictions there are statutory definitions of the business of banking or banking business . When looking at these definitions it is important to keep in mind that they are defining
16016-518: The modern equivalent of this process involves the Carry Trade, see Carry (investment) . Some financial crises have little effect outside of the financial sector, like the Wall Street crash of 1987 , but other crises are believed to have played a role in decreasing growth in the rest of the economy. There are many theories why a financial crisis could have a recessionary effect on the rest of
16159-458: The money market. This problem had been anticipated by the financial markets, which drew greater attention to it. The major UK banks also faced the same problems raising funding, but as less of their business model was reliant upon securitisation, the effective freezing of the market in August 2007 was less critical. On 14 September 2007, the bank sought and received a liquidity support facility from
16302-428: The money they lend. Therefore, they are ready to lend to firms without full guarantees of success. Lenders know that such firms will have problems repaying. Still, they believe these firms will refinance from elsewhere as their expected profits rise. This is Ponzi financing. In this way, the economy has taken on much risky credit. Now it is only a question of time before some big firm actually defaults. Lenders understand
16445-408: The mortgages were sold under Northern Rock's brand through intermediaries, the risk was being underwritten by Lehman Brothers. Mortgages with LTV ("Loan to Value") ratios of up to 130% were made. At the time of being bought by Virgin the bank had 75 branches that have since been re-branded under the Virgin Money name. In 2012 Northern Rock began to provide Virgin-branded savings accounts. The bank
16588-487: The most famous Italian banks, the Medici Bank , in 1397. The Republic of Genoa founded the earliest-known state deposit bank, and Banco di San Giorgio (Bank of St. George), in 1407 at Genoa , Italy. Fractional reserve banking and the issue of banknotes emerged in the 17th and 18th centuries. Merchants started to store their gold with the goldsmiths of London , who possessed private vaults , and who charged
16731-455: The past 20 years, American banks have taken many measures to ensure that they remain profitable while responding to increasingly changing market conditions. This helps in making a profit and facilitates economic development as a whole. Recently, as banks have been faced with pressure from fintechs, new and additional business models have been suggested such as freemium, monetisation of data, white-labeling of banking and payment applications, or
16874-410: The population (the workers) than is available to them to buy all of these goods being produced. Furthermore, the expansion of businesses in the process of competing for markets leads to an abundance of goods and a general fall in their prices, further exacerbating the tendency for the rate of profit to fall . The viability of this theory depends upon two main factors: firstly, the degree to which profit
17017-549: The price up further. Likewise, observing a few price decreases may give rise to a downward price spiral, so in models of this type, large fluctuations in asset prices may occur. Agent-based models of financial markets often assume investors act on the basis of adaptive learning or adaptive expectations. As the most recent and most damaging financial crisis event, the Global financial crisis, deserves special attention, as its causes, effects, response, and lessons are most applicable to
17160-402: The proceeds to make long-term loans to businesses and homeowners. The mismatch between the banks' short-term liabilities (its deposits) and its long-term assets (its loans) is seen as one of the reasons bank runs occur (when depositors panic and decide to withdraw their funds more quickly than the bank can get back the proceeds of its loans). Likewise, Bear Stearns failed in 2007–08 because it
17303-479: The public and creates a demand deposit while simultaneously making loans . Lending activities can be directly performed by the bank or indirectly through capital markets . Whereas banks play an important role in financial stability and the economy of a country, most jurisdictions exercise a high degree of regulation over banks. Most countries have institutionalized a system known as fractional-reserve banking , under which banks hold liquid assets equal to only
17446-410: The purchase by Virgin was titled 'Works for Me' and featured local customers. Following the purchase by Virgin, the Northern Rock brand was gradually phased out during 2012. Upon buying Northern Rock, Virgin Money changed their logo to use both Virgin's red and Northern Rock's magenta colours. Prior to the credit crisis the company had focused on developing its own staff, and most appointments, including
17589-678: The resulting income. Examples include Charles Ponzi 's scam in early 20th century Boston, the collapse of the MMM investment fund in Russia in 1994, the scams that led to the Albanian Lottery Uprising of 1997, and the collapse of Madoff Investment Securities in 2008. Many rogue traders that have caused large losses at financial institutions have been accused of acting fraudulently in order to hide their trades. Fraud in mortgage financing has also been cited as one possible cause of
17732-471: The safest. As the economy grows and expected profits rise, firms tend to believe that they can allow themselves to take on speculative financing. In this case, they know that profits will not cover all the interest all the time. Firms, however, believe that profits will rise and the loans will eventually be repaid without much trouble. More loans lead to more investment, and the economy grows further. Then lenders also start believing that they will get back all
17875-425: The same thing they expect others to do, then self-fulfilling prophecies may occur. For example, if investors expect the value of the yen to rise, this may cause its value to rise; if depositors expect a bank to fail this may cause it to fail. Therefore, financial crises are sometimes viewed as a vicious circle in which investors shun some institution or asset because they expect others to do so. Reflexivity poses
18018-415: The same. As the UK government provided the liquidity support facility, they also exerted pressure on the bank to create a longer-term recovery plan. Over the next few months, there were numerous changes to the board of directors and executive team. On 19 October, chairman Matt Ridley resigned and was replaced by Bryan Sanderson, a former Managing Director of BP. Chief Executive Adam Applegarth's resignation
18161-665: The shares that were taken over by the Government when the bank was nationalised during the 2007–2008 financial crisis. Northern Rock Building Society was formed in 1965 by the merger of two North East of England building societies, both of which were based in Newcastle-upon-Tyne: the Northern Counties Permanent Building Society (established in 1850) and the Rock Building Society (established in 1865). During
18304-425: The spiral may go into reverse, with price decreases causing a rush of sales, reinforcing the decrease in prices. Governments have attempted to eliminate or mitigate financial crises by regulating the financial sector. One major goal of regulation is transparency : making institutions' financial situations publicly known by requiring regular reporting under standardized accounting procedures. Another goal of regulation
18447-456: The subject of investment to be starved of funds and the remaining investors (often those who are least knowledgeable) to be left with devalued assets. Bankruptcies, defaults and bank failures follow as rates are pushed high. After the crisis governments push short-term interest rates low again to diminish the cost of servicing government borrowing which has been used to overcome the crisis. Funds build up again looking for investment opportunities and
18590-549: The taxpayer have been paid in full at penal rates of interest. That means compensation to shareholders will not be a charge on taxpayers or upon the general public because it is payable out of the surplus funds, built since nationalisation in 2008, as a result of asset disposals. The NRSAG claim that despite comparable conditions, no other failed bank was handled in this manner during the global financial crisis. Instead, other banks received full Government backing, bailouts and shareholders retained their shares. The Government has earned
18733-575: The tendency for the rate of profit to fall borrowed many features of the presentation of John Stuart Mill 's discussion Of the Tendency of Profits to a Minimum (Principles of Political Economy Book IV Chapter IV). The theory is a corollary of the Tendency towards the Centralization of Profits . In a capitalist system, successfully-operating businesses return less money to their workers (in
18876-515: The very worst case, lose its own money. But when it borrows in order to invest more, it can potentially earn more from its investment, but it can also lose more than all it has. Therefore, leverage magnifies the potential returns from investment, but also creates a risk of bankruptcy . Since bankruptcy means that a firm fails to honor all its promised payments to other firms, it may spread financial troubles from one firm to another (see 'Contagion' below). For example, borrowing to finance investment in
19019-399: The world economy at the pace of 20 and 50 years have been the subject of studies since Jean Charles Léonard de Sismondi (1773–1842) provided the first theory of crisis in a critique of classical political economy's assumption of equilibrium between supply and demand. Developing an economic crisis theory became the central recurring concept throughout Karl Marx 's mature work. Marx's law of
19162-414: The year, while the share of US banks increased from 11% to 13%. Fee revenue generated by global investment in banking totalled US$ 66.3 billion in 2009, up 12% on the previous year. The United States has the most banks in the world in terms of institutions (5,330 as of 2015) and possibly branches (81,607 as of 2015). This is an indicator of the geography and regulatory structure of the US, resulting in
19305-485: The yen to rise in value, and therefore has an incentive to buy yen, too. Likewise, a depositor in IndyMac Bank who expects other depositors to withdraw their funds may expect the bank to fail, and therefore has an incentive to withdraw, too. Economists call an incentive to mimic the strategies of others strategic complementarity . It has been argued that if people or firms have a sufficiently strong incentive to do
19448-399: Was a policy well known to cause failures (see Banking School Theory of Crises under Financial Crises ) when short-term interest rates rose above long-term rates and insufficient hedging was in place. The bank was nationalised at 00:01 on 22 February 2008 following two unsuccessful bids to take over the bank, neither being able to fully commit to repayment of taxpayers' money. In doing so,
19591-413: Was announced that the bank was to be sold to a single buyer in the private sector by the end of the year. On 22 March 2011, the bank issued its first mortgage securitisation since the 2007 recession which nearly brought the bank down. On 17 November 2011, it was announced that Virgin Money was going to buy Northern Rock plc for £747 million. The sale was completed on 1 January 2012, and by July of that year
19734-701: Was based on a large site at the Regent Centre in Gosforth , Newcastle upon Tyne called Northern Rock House . It had customer contact centre operations at both North of England House in Doxford International Business Park in Sunderland and at its head office. The bank developed a site at Rainton Bridge, which it sold to Npower . Northern Rock completed the redevelopment of the Gosforth site, Northern Rock House , in
19877-514: Was currently government owned. However, there was no guarantee that if Northern Rock was to fail that the government would top-up any compensation over and above the standard £85,000 offered by the Financial Services Compensation Scheme . Former shareholders and hedge funds also took legal action in January 2009 to get compensation for their shares; the shareholders lost the case. They also lost their appeals in
20020-428: Was partly funded by an increase in the government loan and a reversal of previous strategy to pay the loan off as quickly as possible by actively encouraging mortgage customers to leave when their mortgage deal matured. The reason for this change was government policy to increase the availability of credit. This £14 billion was to be split into £5 billion in 2009 and £9 billion in 2010. Potential buyers for
20163-734: Was the spread of the Thai crisis in 1997 to other countries like South Korea . However, economists often debate whether observing crises in many countries around the same time is truly caused by contagion from one market to another, or whether it is instead caused by similar underlying problems that would have affected each country individually even in the absence of international linkages. The nineteenth century Banking School theory of crises suggested that crises were caused by flows of investment capital between areas with different rates of interest. Capital could be borrowed in areas with low interest rates and invested in areas of high interest. Using this method
20306-405: Was then announced in mid-November, with the caveat that he would remain with the group until it established independent funding or was purchased. Four non-executive directors, Sir Derek Wanless, Nichola Pease, Adam Fenwick and Rosemary Radcliffe also resigned. A month later, Applegarth left and former Marketing Director, Andy Kuipers, was appointed Chief Executive. Kuipers had been with the bank since
20449-449: Was unable to renew the short-term debt it used to finance long-term investments in mortgage securities. In an international context, many emerging market governments are unable to sell bonds denominated in their own currencies, and therefore sell bonds denominated in US dollars instead. This generates a mismatch between the currency denomination of their liabilities (their bonds) and their assets (their local tax revenues), so that they run
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