Reference no: EM13720805
Liquidity Risk
Northern Rock, now part of Virgin Money, was the first British bank which experienced a bank run in 150 years. Northern Rock used to be one of fastest growing mortgage banks in England during early 2000's. Before the subprime mortgage crisis, Northern Rock's main business was to arrange residential property mortgages with short-term borrowed funds.
Instead of keeping these mortgage loans on their balance sheet, Northern Rock decided to securitize these mortgages and used the funds from issuing MBS (mortgage-back securities) to write more mortgage. When the housing market turned sluggish in 2006, demands for MBS faded and Northern Rock found it difficult to refinance their short-term borrowing.
In September 2007, Bank of England, central bank of United Kingdom, provided the first supportive liquidity facility to Northern Rock for the settlement of their obligation in money market. This news led to an unexpected feedback, that is, many depositors with savings in Northern Rock decided to withdraw their money. The bank run exacerbated Northern Rock's liquidity and finally, it was nationalized after two unsuccessful takeover attempts by other banks.
Take Northern Rock as an example to manifest how liquidity risk interacts with other major risks faced by a financial institution You need to make reference to at least three articles from professional media.
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