Presented by:Miryana MarinaClarisaFouzImtiazAzharSyedFemi

Introduction

There are a lot of factors which led Northern Rock into the crisis. We will consider this from different aspects ;HistoryLawsCurrent scenarioFuture recommendations

ObjectivesObjectives

• To analyze and evaluate the situation of To analyze and evaluate the situation of Northern Rock problems from different Northern Rock problems from different perspectives.perspectives.

• Key players involved in the crisis.Key players involved in the crisis.

• Role of Financial Services Authority (FSA)Role of Financial Services Authority (FSA)

• Role Bank of EnglandRole Bank of England

Key Players responsible for crisisKey Players responsible for crisis

• Executive DirectorsExecutive Directors• Non-Executive DirectorsNon-Executive Directors• Audit, Nominations, Remuneration & Risk Audit, Nominations, Remuneration & Risk

committeescommittees• External and Internal auditors and lawyersExternal and Internal auditors and lawyers• Financial analysts, credit rating agencies Financial analysts, credit rating agencies • MediaMedia• Financial Services Authority (FSA)Financial Services Authority (FSA)• Bank of EnglandBank of England• Politicians and governmentPoliticians and government

The Role of FSAThe Role of FSA

• FSA ignored the Qualification of DirectorsFSA ignored the Qualification of Directors

• FSA Fails to utilize its powers to stop FSA Fails to utilize its powers to stop Northern Rock from risky landings Under Northern Rock from risky landings Under section 45 of (Financial Services and section 45 of (Financial Services and Markets Act 2000)Markets Act 2000)

• The weaknesses in Northern Rock’s The weaknesses in Northern Rock’s business model were ignored by FSAbusiness model were ignored by FSA

• FSA failed to give complete attention to stress testing conducted by Northern Rock

• FSA allowed Northern Rock to weaken its FSA allowed Northern Rock to weaken its balance sheet during Financial crises balance sheet during Financial crises (Article 45)(Article 45)

Bank of England

• Banker’s bank

• Debt Manager

• Policy maker (Monetary & Fiscal)

• Lender of the last resort

Role of The Bank of England

• Financial Stability Role:Financial Stability Role:

– People need confidence on system People need confidence on system – Draw attestation to potential vulnerabilitiesDraw attestation to potential vulnerabilities– Reduction of risksReduction of risks

• Supervisory Role:Supervisory Role:– Financial Service and Markets Act 2000Financial Service and Markets Act 2000– Ceased to exercise its functions as supervisor of banksCeased to exercise its functions as supervisor of banks

(Article 10 Banking Reforms Seventeenth Session 2007 - 08)(Article 10 Banking Reforms Seventeenth Session 2007 - 08)

• Differences of opinion among the tripartite authorities Differences of opinion among the tripartite authorities (Article 26 of Banking Reform Seventeenth session 2007 - 08)(Article 26 of Banking Reform Seventeenth session 2007 - 08)

The Role of Bank of EnglandThe Role of Bank of England

• Bank of England did not inject cash during Bank of England did not inject cash during liquidity crisis because of lack of liquidity crisis because of lack of confidence among banks confidence among banks (Article 10 treasury report)(Article 10 treasury report)

• Later they injected cash with higher Later they injected cash with higher interest rateinterest rate

• Failure of Bank of England to protect Failure of Bank of England to protect banks against moral hazard (Article 10 of banks against moral hazard (Article 10 of House of Commons)House of Commons)

• Lack of Interest by Bank of EnglandLack of Interest by Bank of England

Northern Rock Financial Northern Rock Financial performance over the yearsperformance over the years

NR Liability StructureNR Liability Structure

25,208 25,209 28,003

75,312 75,14992,306

1.3 1.3 1.3

2004 2005 2006

Debt Equity Ratio £m

Deposits Lendings Ratio

NR Borrowings NR Borrowings

NR Directors Remuneration £ 000

2004 2005 2006

AJ Applegarth 964 1168 1,364

DF Baker 630 730 900

RF Bannet 637 738 909

KM Currie 0 510 725

AM Kuipers 0 510 725Total 2,213 3,656 4,623

Recommendations Recommendations • FSA should focus more on prudential supervision, FSA should focus more on prudential supervision,

including liquidity and stress testingincluding liquidity and stress testing

• Increase number of supervisory staff engaged with Increase number of supervisory staff engaged with high impact firms and the creation of a new group of high impact firms and the creation of a new group of supervisory specialistssupervisory specialists

• FSA and Bank of England need to strengthen their FSA and Bank of England need to strengthen their resources of data and improve their qualityresources of data and improve their quality

((House of Commons Treasure Committee, Banking Reform Seventeenth Report)

• FSA to improve quality and resourcing of their FSA to improve quality and resourcing of their financial analysis financial analysis

• Raised emphasis on assessing the competence Raised emphasis on assessing the competence of firms’ senior management of firms’ senior management

• Bank of England improvement on liquidity Bank of England improvement on liquidity

management trough correct Monetary policymanagement trough correct Monetary policy • Bank of England should establish a Financial Bank of England should establish a Financial

Stability Committee Stability Committee

(House of Commons Treasure Committee, Banking Reform (House of Commons Treasure Committee, Banking Reform Seventeenth Report)Seventeenth Report)

FSA and Bank of England have been acting very inadequate in their regulating and supervision roles. Some changes in their practice are necessary to be made. Following some recommendations will prevent Special Resolution Regime to came into act.

Thank you for your attention!