Financial Regulation Assignment Northern Rock Cas

Question 1: The Northern joggle case demonstrates that pecuniary regulators should not view modern coin banking separately from not bad(p) securities industry developments. A) Describe the liquidity spiral at work in the Northern Rock case Liquidity spirals argon going spirals which start as a result of deprecation of as snip measure whereby the net grade decreases faster than the gross value (be exercise of their leverage). Assuming a constant leverage ratio, the drop in value of the asset get out force the company to distributively raise more capital (not likely if the market is already tight) or to sell assets at a time when the prices share already dropped. The selling of the assets will push the prices down that which will inevitably result in more sales. The financial institutions capital erodes and, at the same time, lending standards and margins tighten. Both make cause ?re-sales, pushing down prices and tightening support horizontal provided ( Brunnermeier and Pedersen, 2005). Notwithstanding the fact that Northern Rock was ab initio set up as a regionally ground institution, the stick had experienced a rapid growth during the go out front its crisis mid 2007. Northern Rocks substance assets had self-aggrandising from 17.4 billion pounds to 113.5 billion pounds by June 2007, making it the fifth largest bank in the UK by mortgage assets.

The mount of these assets caused a hammy change in the composition of Northern Rocks liabilities. The bank was highly leveraged and strongly relied on non-retail financial support ( short-run). The traditional retail funding was m ainly replaced by short-term get in the cap! ital market, securitized notes and other form of non-retail funding such as interbank deposits, covered bonds and wholesale funding. The covered bonds are long-term liabilities (against securitized mortgage assets) and as such they are illiquid. The securitized notes had a speciality to long-term maturity (average of over one year). The wholesale funding consisted of a mixture of short and medium...If you want to ascertain a full essay, order it on our website: BestEssayCheap.com

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