Risk register · entry
Q4 · Where models dieNorthern 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.
Why this quadrant
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- Once customers learned of the Bank of England support facility, queues formed outside branches and £4.6 billion was withdrawn over a few days.certain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
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