Chapter 563 25 Billion Pounds

Northern Rock Bank was founded in 1850. In its early days, it was just a housing loan association. In 1997, it became a bank and went public.

Currently, the bank is the fifth largest mortgage institution in the UK, with 1.5 million depositors and provides mortgages to 800,000 home buyers. It is a huge scale.

In the first half of this year, the new mortgage loans of Northern Rock Bank accounted for 18.9% of the total new mortgage loans in the country, ranking first in the UK.

In fact, unlike other banks whose funds mainly come from depositors, although Northern Rock Bank has been transformed into a listed bank in 1997, most of its funds still come from financial institutions.

Among the funds of Northern Rock Bank, the funds obtained from retail deposit business are less than 25% of the total, and more than 75% of the funds come from the wholesale market - that is, financing through interbank lending, issuing bonds or selling asset-backed securities.

Given the stability of retail deposit financing, Northern Rock Bank, whose funds mostly come from the wholesale market, is more susceptible to the supply and demand of funds in the market.

In addition, Northern Rock Bank is known for its bold lending, which is similar to the practices of New Century Financial Corporation. It lends buyers up to 100% of the house price, which is 5 to 6 times the income of the buyers, and some even give 125% of the house price!

And it also lends a lot of money to investors who buy houses for rent.

These radical measures have made Northern Rock Bank the first in the UK in terms of new mortgage loans.

Therefore, when the subprime mortgage crisis swept the United States and the global banking industry was cautious, many banks had no idea how much money was invested in this shaky system.

All banks began to tighten their purse strings and slowed down or stopped lending to each other.

Against this backdrop, Northern Rock Bank naturally encountered the problem of financing difficulties.

It is precisely because of this that when depositors were worried about a run on the bank, Northern Rock Bank's cash flow immediately dried up...

It is said that in just a few days, depositors had withdrawn more than 2 billion pounds of deposits from Northern Rock Bank.

Northern Rock Bank has about 1.5 million depositors, who originally had about 24 billion pounds in deposits in the bank.

But it is obvious that due to its aggressive lending strategy, Northern Rock Bank can no longer cope with more bank runs and can only seek help from the British financial regulator and the Bank of England.

Even Northern Rock Bank once tried to contact DS Group to ask if they could repay the previous mortgage loan in advance - starting from mortgaging part of O2 Telecom shares to borrow 4 billion pounds from Northern Rock Bank, DS Group's total loan amount in this bank has exceeded 6.5 billion pounds.

But these loans are all 5-year loans, so DS Group rejected the other party without hesitation. After all, everyone needs to do things according to the contract...

In the end, the previous scene appeared. In order to cope with the crisis, British Chancellor of the Exchequer Darling announced on September 25 that the British government will provide guarantees for Northern Rock Bank to ensure the safety of depositors' deposits in the bank.

Darling said: "Depositors can continue to withdraw money from Northern Rock Bank, but if they choose to keep their money in the bank, we will ensure the safety of their deposits." He also said that the Bank of England, the central bank of England, and the Financial Services Authority will work together to ensure the "normal operation" of Northern Rock Bank. After the news came out, more depositors went to Northern Rock Bank to line up to withdraw money... When long queues began to form in front of the bank and TV news began to report, the report of "Northern Rock Bank suffered another run" reached everyone's ears. Those depositors who deposited money online withdrew their cash so much that the bank's server could no longer bear such a heavy load. When the news that online customers could not withdraw cash spread, the panic intensified. Everyone was worried that when the bank had fallen to the point where it needed to seek help from the government and the Bank of England, the safest way was to withdraw their deposits in the bank... By now, the share price of Northern Rock Bank has fallen by more than 80% from its highest point this year! For Catherine, the 8% of Northern Rock Bank shares she held were indeed a heavy loss, but the previous short selling had maximized the loss.

DS Holdings also made a huge profit by shorting Northern Rock Bank.

And ironically, the stocks they borrowed to short Northern Rock Bank may even have come from the Hall family...

But it is still not the end.

After the Bank of England injected 12 billion pounds of funds into Northern Rock Bank on behalf of the British government on September 25, the bank run did not ease, but intensified...

The Bank of England had to inject a second 8 billion pounds of funds into Northern Rock Bank a week later, and finally the run on Northern Rock Bank was gradually calmed down.

However, both the shareholders of Northern Rock Bank and the British government understand that the bank has only been temporarily bandaged to stop the bleeding. In order for it to survive, it is necessary to restore the confidence of investors and depositors in the bank, otherwise the only result waiting for Northern Rock Bank is bankruptcy.

But first of all, everyone is extremely disappointed with the operation of Northern Rock Bank; in addition, it is still difficult to calculate specifically how much loss Northern Rock Bank has suffered in this turmoil under the influence of the subprime mortgage crisis. Therefore, Northern Rock Bank alone cannot survive this crisis safely.

Therefore, the British government's opinion at this time is to find a suitable successor for Northern Rock Bank to rectify the bank and restore market confidence.

In fact, since the run on Northern Rock Bank, it is not that there are no other banks and institutions interested in it.

For example, there are more than a dozen companies and consortiums including Virgin Group, the consortium led by investment company Olivant, and Paul Thompson.

Among them, there is also a consortium formed by Standard Chartered Bank and DS Group.

However, although there are many institutions and consortiums interested in Northern Rock Bank, it is still difficult to reach an acquisition agreement in a short period of time.

Because these institutions and consortiums, in addition to negotiating with the board of directors of Northern Rock Bank on the acquisition, their acquisition also needs the consent of the British government, the largest creditor of Northern Rock Bank at this time.

This is the most difficult point. You must know that when the bank run occurred in Northern Rock Bank, the British government injected a total of 20 billion pounds of funds into it through the Bank of England in two times, and later, in order to rectify its lending business, the Bank of England injected another 5 billion pounds of funds into Northern Rock Bank...

And this total of 25 billion pounds of funds is not free for Northern Rock Bank to use.

Because according to the British government's philosophy, there has always been very little intervention in banks-this is why Northern Rock Bank took more than ten days to decide to rescue it after it asked the government and the central bank for help after the bank run.

In the meantime, the British Treasury, the central bank and the Financial Services Authority had a heated discussion on whether to make a decision to rescue Northern Rock Bank. In the end, in order to prevent the situation from spreading and expanding, they finally decided to inject capital to rescue Northern Rock Bank.

But at the same time, this kind of rescue must not be free of charge, so as to avoid other banks from making rash business decisions and eventually leaving the mess to the government - in short, the shareholders and management of Northern Rock Bank must pay for their mistakes.

Therefore, the 25 billion pounds of funds injected by the Bank of England into Northern Rock Bank were all in the form of loans, and interest had to be paid to the government.