Northern Rock bank run

Funded long mortgages with short-term wholesale money. It froze, and Britain queued: first bank run in 150 years.

The world stops matching the model. Regime change and leverage turn a small error fatal.

Room: Q4 Where models die
Year: 2007
Impact: £4.6B
Sector: Mortgage bank
Region: Europe
Category: Economic

Why this room

Northern Rock's model assumed continuous access to securitisation and wholesale markets, and it was engineered to the edge of that assumption: retail deposits and funds had fallen from 62.7% of total liabilities and equity at end-1997 to 22.4% at end-2006, against assets of £101.0 billion. The regime changed in August 2007 when wholesale funding markets stopped clearing, and the assumption that had underwritten a decade of growth ceased to describe the world. Leverage and maturity mismatch then converted an ordinary funding stress into a solvency-scale event within weeks. That is the q4 pattern: the model did not misprice risk so much as depend on a state of the world that ended.

The record

Once customers learned of the Bank of England support facility, queues formed outside branches and £4.6 billion was withdrawn over a few days.certain
Retail deposits and funds fell from 62.7% of Northern Rock's total liabilities and equity at end-1997 to 22.4% at end-2006, standing at £22.6 billion against total assets of £101.0 billion.certain
Chief executive Adam Applegarth described the funding base as roughly 50% securitisation, 10% covered bonds and 25% wholesale borrowings, half of the wholesale portion having a duration of less than one year.certain
In early December 2007 Northern Rock disclosed that it had borrowed £25 billion from the Bank of England; by the time of the Public Accounts Committee's review the Treasury was protecting £51 billion of public loans and guarantees.certain
The period from Friday 14 September to Monday 17 September 2007 saw the first run on the retail deposits of a United Kingdom bank since Victorian times, and in the first half of 2007 Northern Rock's loans to customers had risen by a net £10.7 billion.certain

Sources

The book

This entry is one of 111 in the register. The full story, and what it cost the people who lived it, is in Risky Business by Claudia Zeisberger, David Munro and Joanna Reijgersberg-Siew.

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