자료 1: THE FAILURE OF NORTHERN ROCK: A MULTI-DIMENSIONAL CASE STUDY (Eds. Franco Bruni and David T. Llewellyn, 2009)
※ 발췌(excerpt):
In August 2007 the United Kingdom experienced its first bank run in over 140 years. Although Northern Rock was not a particularly large bank (it was at the time ranked 7th in terms of assets) it was nevertheless a significant retail bank and a substantial mortgage lender. In fact, ten years earlier it had converted from a mutual building society whose activities were limited by regulation largely to retail deposits and mortgages.
( ... ... )
Solvency vs. Liquidity. A distinction is conventionally made between the solvency and liquidity of a bank. This distinction is more difficult to make in practice than in theory. Northern Rock remained legally solvent and yet was dependent on Bank of England funding because it could not fund its operations in the markets. However, there is a question about this concept of solvency when applied to a bank which:
- (1) has serious funding problems in the open market,
- (2) where the cost of funding exceeds the average rate of interest on the bank’s assets, and
- (3) when it is dependent on support from the Bank of England. The distinction between illiquidity and insolvency is, therefore, not always clear cut and, under some circumstances, illiquidity can force a solvent institution to become insolvent. Furthermore, if depositors know that the bank is illiquid they may be induced to withdraw deposits, which, in turn, forces the bank to sell assets at a discount in order to pay out depositors. Given that banks operate with a relatively low equity capital ratio, the fire-sale discount does not need to be very large to exhaust the bank’s capital and force it into legal insolvency.
( ... ... )
자료 2: THE NORTHERN ROCK CRISIS: A MULTI-DIMENSIONAL PROBLEM WAITING TO HAPPEN (David T Llewellyn)
※ 발췌(excerpt):
For three days in August 2007, the UK experienced its first run on a bank since Overend and Gurney, the London wholesale discount bank in 1866. Around £3 billion of deposits were withdrawn (around 11 percent of the bank’s total retail deposits) from a medium sized bank – Northern Rock (NR). The unedifying spectacle of widely-publicised long queues outside the bank’s branches testified to the bank’s serious problems. The NR crisis was the first time the Bank of England (BOE), the UK’s central bank, had operated its new money market regime in conditions of acute stress in financial markets, and it was the first time it had acted as a lender-of-last-resort for many years.
Norther Rock (previously a UL mutual building society) converted to bank status in 1997. Without the previous constraints on its operating permissions, it acquired legal powers to conduct the full range of banking business. However, it remained focused predominantly on the residential mortgage market. ( ... )
Before considering the nature of NR crisis, several points of perspective are noted at the outset: the bank remained legally solvent (the nominal value of assets exceeding liabilities), only months earlier the bank had reported record profits, the quality of its assets was never in question, its loan-loss record was good by industry standards, and for many years the bank was regarded as a star-performer in the financial markets.
Two problems emerged during the summer months of 2007: there was a generalised lack of confidence in a particular asset class(mortgage bank[?backed] securities) associated in large part with developments in the sub-prime mortgage market in the United States; and doubts emerged about the viability of the NR business model in particular.
( ... )
The Context of Financial Market Turmoil
( ... ) Recent years have experienced an unprecedented wave of complex financial innovation with the creation of new financial instruments and vehicles. In the words of the BOE, this financial innovation had the effect of "creating often opaque and complex financial instrument with high embedded leverage" (BOE, 2007a). Two major instruments at the center of the financial market turmoil were Securitisation and Collateral Debt Obligations(CDOsㅡinstruments created from a portfolio of asset-backed securities and then broken into tranches of varying default risk with resulting varied prices): in both cases issue volumes rose sharply in the years prior to the crisis. Figure 1 shows the sharp rise in European securitisations, and Figure 2 indicates the volume of global CDO issues and particularly the sharp increases in 2006 and the first half of 2007, followed by an almost total collapse in the summer months of that year.
( ... )
Although NR was not exposed to the US SPM market, it became caught up in all this because of its business model: securitization as a central business model, and reliance on short-term money market funding. It faced several related problems: it could not securitise and sell new mortgage assets and hence needed to keep assets on the balance sheet that it had intended to sell, and it faced a sharp rise in interest rates in the money market with the result that borrowing costs (even in the event that it could borrow at all) rose above the yield on its mortgage assets.
( ... ) In any case, a bank run can be rational if all depositors believe the bank is solvent but also believe all other depositors believe it is not.
( ... ... )
Before considering the nature of NR crisis, several points of perspective are noted at the outset: the bank remained legally solvent (the nominal value of assets exceeding liabilities), only months earlier the bank had reported record profits, the quality of its assets was never in question, its loan-loss record was good by industry standards, and for many years the bank was regarded as a star-performer in the financial markets.
Two problems emerged during the summer months of 2007: there was a generalised lack of confidence in a particular asset class(mortgage bank[?backed] securities) associated in large part with developments in the sub-prime mortgage market in the United States; and doubts emerged about the viability of the NR business model in particular.
( ... )
The Context of Financial Market Turmoil
( ... ) Recent years have experienced an unprecedented wave of complex financial innovation with the creation of new financial instruments and vehicles. In the words of the BOE, this financial innovation had the effect of "creating often opaque and complex financial instrument with high embedded leverage" (BOE, 2007a). Two major instruments at the center of the financial market turmoil were Securitisation and Collateral Debt Obligations(CDOsㅡinstruments created from a portfolio of asset-backed securities and then broken into tranches of varying default risk with resulting varied prices): in both cases issue volumes rose sharply in the years prior to the crisis. Figure 1 shows the sharp rise in European securitisations, and Figure 2 indicates the volume of global CDO issues and particularly the sharp increases in 2006 and the first half of 2007, followed by an almost total collapse in the summer months of that year.
( ... )
Although NR was not exposed to the US SPM market, it became caught up in all this because of its business model: securitization as a central business model, and reliance on short-term money market funding. It faced several related problems: it could not securitise and sell new mortgage assets and hence needed to keep assets on the balance sheet that it had intended to sell, and it faced a sharp rise in interest rates in the money market with the result that borrowing costs (even in the event that it could borrow at all) rose above the yield on its mortgage assets.
( ... ) In any case, a bank run can be rational if all depositors believe the bank is solvent but also believe all other depositors believe it is not.
( ... ... )
3. Solvency v. Liquidity. A distinction is conventionally made between the solvency and liquidity of a bank. This distinction is more difficult to make in practice than in theory. At the time of writing (October, 2007) NR remained legally solvent and yet was dependent on BOE funding because it could not fund its operations in the markets. However, there must be a question about this concept of solvency when applied to a bank which: (1) has serious funding problems in the open market, (2) where the cost of funding exceeds the average rate of interest on the bank’s assets, and (3) when it is dependent on support from the BOE.
( ... ... )
자료 3: Northern Rock (Wikipedia)
( ... ) Under the chairmanship of Matt Ridley Northern Rock had a business plan which involved[:]
자료 4: Northern Rock: Lessons of the fall (The Economist, Oct 18th 2007)
( ... ) The business model of Britain's fastest-growing mortgage bankㅡwhich funded its loan book mainly from the wholesale markets, rather than from retail depositsㅡhad been prudence itself, they explained, derailed only by sloppy lending in America that cause those markets to seize up in August. ( ... )
The Faster They Come
The year that Northern Rock fell from grace could hardly have started more promisingly. In January the bank announced record pre-tax profits of £627m for 2006, 27% higher than the previous year's. This marked a decade of success since its conversion in 1997 from a building society—a residential mortgage lender owned by its savers and borrowers—into a bank quoted on the stockmarket. Year after year its assets had grown by a fifth, even though it had few branches—128 when it converted and 76 this year. A small local lender had become Britain's fifth-biggest mortgage provider, ambitious to become its third-biggest before long.
The trick Northern Rock pulled off was to rely on wholesale markets rather than on retail deposits to finance most of its lending. More than any other big British lender, it relied on “securitising” its mortgages. The bank bundled its loans together and packaged them into bonds that it sold to investors around the world. In January 2007 it raised £6.1 billion that way; a second securitisation in May brought the first-half total to £10.7 billion and made Northern Rock the top securitiser among British banks (see chart 1). With money swirling around the world's capital markets, securitisation worked a treat. By tapping global wholesale markets, Northern Rock was able to raise money more cheaply than its home-bound rivals, price its mortgage offers more keenly and carry on its hectic expansion.
( ... )
The FSA's apparent insouciance was even stranger given Northern Rock's specific history. In 2004, after short-term interest rates shot up, the bank was caught off-guard, and profits suffered. It promised investors that half its loans would be matched by retail deposits—a pledge it promptly ignored once rates moderated. By the time it hit trouble this year, just under a quarter of Northern Rock's funding came from retail customers.
( ... )
But there were good reasons to doubt the wisdom of relying so heavily on the capital markets. Though retail deposits cost a lot to acquire, many banks still prefer them, for they are generally a more steadfast source of finance than wholesale funding. A former chief risk officer at one of Britain's biggest banks says that Northern Rock's operating model was very risky: “To say that nobody could have envisaged what happened doesn't wash at all.”
( ... )
Yet both Northern Rock and the FSA assert that the event that felled the bank—the complete failure of the various market-based funding sources upon which it had become reliant—could not have been foreseen. Mr Applegarth has stressed the speed, duration and global nature of the liquidity freeze that started on August 9th. “I didn't see this coming, I have yet to find someone who did,” he said. The FSA has played a similar card: in parliamentary testimony on October 9th, Sir Callum McCarthy, the regulator's chairman, insisted that the seizing-up of the money markets was unprecedented.
( ... )
자료 3: Northern Rock (Wikipedia)
( ... ) Under the chairmanship of Matt Ridley Northern Rock had a business plan which involved[:]
- (1) borrowing heavily in the UK and international money markets,
- (2) extending mortgages to customers based on this funding,
- and then (3) re-selling these mortgages on international capital markets, a process known as securitisation.
자료 4: Northern Rock: Lessons of the fall (The Economist, Oct 18th 2007)
( ... ) The business model of Britain's fastest-growing mortgage bankㅡwhich funded its loan book mainly from the wholesale markets, rather than from retail depositsㅡhad been prudence itself, they explained, derailed only by sloppy lending in America that cause those markets to seize up in August. ( ... )
The Faster They Come
The year that Northern Rock fell from grace could hardly have started more promisingly. In January the bank announced record pre-tax profits of £627m for 2006, 27% higher than the previous year's. This marked a decade of success since its conversion in 1997 from a building society—a residential mortgage lender owned by its savers and borrowers—into a bank quoted on the stockmarket. Year after year its assets had grown by a fifth, even though it had few branches—128 when it converted and 76 this year. A small local lender had become Britain's fifth-biggest mortgage provider, ambitious to become its third-biggest before long.
The trick Northern Rock pulled off was to rely on wholesale markets rather than on retail deposits to finance most of its lending. More than any other big British lender, it relied on “securitising” its mortgages. The bank bundled its loans together and packaged them into bonds that it sold to investors around the world. In January 2007 it raised £6.1 billion that way; a second securitisation in May brought the first-half total to £10.7 billion and made Northern Rock the top securitiser among British banks (see chart 1). With money swirling around the world's capital markets, securitisation worked a treat. By tapping global wholesale markets, Northern Rock was able to raise money more cheaply than its home-bound rivals, price its mortgage offers more keenly and carry on its hectic expansion.
( ... )
The FSA's apparent insouciance was even stranger given Northern Rock's specific history. In 2004, after short-term interest rates shot up, the bank was caught off-guard, and profits suffered. It promised investors that half its loans would be matched by retail deposits—a pledge it promptly ignored once rates moderated. By the time it hit trouble this year, just under a quarter of Northern Rock's funding came from retail customers.
( ... )
But there were good reasons to doubt the wisdom of relying so heavily on the capital markets. Though retail deposits cost a lot to acquire, many banks still prefer them, for they are generally a more steadfast source of finance than wholesale funding. A former chief risk officer at one of Britain's biggest banks says that Northern Rock's operating model was very risky: “To say that nobody could have envisaged what happened doesn't wash at all.”
( ... )
Yet both Northern Rock and the FSA assert that the event that felled the bank—the complete failure of the various market-based funding sources upon which it had become reliant—could not have been foreseen. Mr Applegarth has stressed the speed, duration and global nature of the liquidity freeze that started on August 9th. “I didn't see this coming, I have yet to find someone who did,” he said. The FSA has played a similar card: in parliamentary testimony on October 9th, Sir Callum McCarthy, the regulator's chairman, insisted that the seizing-up of the money markets was unprecedented.
( ... )
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