In 2008 the Northern Rock bank was nationalised by the British government, due to financial problems caused by the subprime mortgage crisis. In 2010 the bank was split into two parts (assets and banking) to aid the eventual sale of the bank back to the private sector.
On 14 September 2007, the bank sought and received a liquidity support facility from the Bank of England, as a result of its exposure in the credit markets, during the 2008 financial crisis. On 22 February 2008 the bank was taken into state ownership. The nationalisation followed two unsuccessful bids to take over the bank, neither being able to fully commit to repayment of savers' and investors' money.
In 2012, Virgin Money completed the purchase of Northern Rock from UK Financial Investments (UKFI) for approximately £1 billion and by October of that year the high street bank operated under the Virgin Money brand.
2007 credit crisis
Emergence
On 12 September 2007, Northern Rock asked the Bank of England, as lender of last resort in the United Kingdom, for a liquidity support facility due to problems in raising funds in the money market to replace maturing money market borrowings. The problems arose from difficulties banks faced over the summer of 2007 in raising funds in the money market. Despite Northern Rock appearing to be in a stronger position than other UK banks on paper, it faced a liquidity problem because institutional lenders became nervous about lending to mortgage banks following the US sub-prime crisis. Bank of England figures suggest that Northern Rock borrowed £3 billion from the Bank of England in the first few days of this crisis.
Government intervention
With shares in Northern Rock plummeting by nearly a third, the British Government moved to reassure investors with the bank, with account holders urged not to worry about the bank going bust. The Treasury select committee chairman John McFall MP said: "I don't think customers of Northern Rock should be worried about their current accounts or mortgages."
Northern Rock was not the only British bank to have called on the Bank of England for funds since the sub-prime crisis began but is the only one to have had emergency financial support from the Tripartite Authority (The Bank of England, the FSA and HM Treasury). However, the bank was more vulnerable to a credit crunch as its 'high risk' business model depended on funding from the wholesale credit markets, 75% of its funds coming from this source. In his address to the Treasury Select Committee, Bank of England governor Mervyn King had stated emergency funds would be made available to any British bank that needed it, but at a penalty rate, to ensure that lenders who had made bad lending decisions would suffer relative to lenders who had made sensible lending decisions.
In December, the EU regulators approved Britain's actions to provide aid to the bank by concluding that it was in line with European emergency aid rules.
Run on the bank
On Friday 14 September 2007, the first day branches opened following the news, many customers queued outside branches to withdraw their savings (a run on the bank). This bank run was not the traditional form, where depositors withdraw money in a snowball effect, leading to a liquidity crisis; instead, it occurred in the aftermath of the liquidity crisis. It was estimated that £1 billion was withdrawn by customers that day, about 5% of the total bank deposits held by Northern Rock.
On Monday 17 September, as worried savers continued to flock to some Northern Rock bank branches to withdraw their savings, it was reported that an estimated £2 billion had been withdrawn since the bank applied to the Bank of England for emergency funds. By early afternoon in London, Northern Rock's shares, which had lost 32% on the previous Friday, fell a further 40% from 438 pence to 263 pence.
Later that day, the Chancellor of the Exchequer, Alistair Darling, announced that the British Government and the Bank of England would guarantee all deposits held at Northern Rock. Northern Rock shares rose by 16% after this was announced.
Stabilisation
The announcement by the chancellor showed its intended effects the next day, as the queues outside Northern Rock's branches gradually disappeared. In addition, Northern Rock had a series of advertisements published in major UK newspapers to reaffirm that their customers' money was safe.
In an interview on BBC Radio 4, Bank of England governor Mervyn King revealed that they had anticipated emergency funding to be in the £20–30bn range.
What we want to do is to give incentives for people to behave properly, so in judging the interest rate at which we lent to Northern Rock we asked ourselves the question: "At what interest rate would they have to pay in borrowing from us today that would make them regret not having taken out an insurance policy as Countrywide did before the 9th of August?"
Boardroom changes
Matt Ridley was forced to resign as chairman in 2007, having been blamed in parliamentary committee hearings for not recognising the risks of the bank's financial strategy and thereby "harming the reputation of the British banking industry".
John Devaney and Simon Laffin joined the board in November 2007, when Sir Derek Wanless, Nichola Pease, Adam Fenwick and Rosemary Radcliffe retired as non-executive directors. The chief executive, Adam Applegarth, stayed on in a caretaker role until December 2007. David Baker and Keith Currie left the board, but remained employed within the company. Currie later took early retirement with a bonus package reportedly worth £2.5 million, and in 2012, aged 56, was found dead at his home.
The chief executive after the departure of Applegarth was Andy Kuipers, who joined the company in 1987, and later left on 31 August 2008.
Growth of Bank of England loan
By January 2008, Northern Rock's loan from the Bank of England had grown to £26bn. On 11 January, Northern Rock announced that it had sold its portfolio of lifetime home equity release mortgages to JP Morgan for £2.2bn and that it would use this to pay off a piece of the Bank of England loan.
On 6 February, the Office for National Statistics announced that it was treating Northern Rock as a public corporation, similar to the BBC and Royal Mail for accounting purposes, causing the loans (approximately £25 billion) and guarantees (approximately £30 billion) extended by the Bank of England and the value of the company's mortgage book (approximately £55 billion), provisionally estimated to total around £100 billion, to be added to the National Debt. Although not technically a nationalisation, the decision effectively acknowledged that "In all but name, Northern Rock is now nationalised".
The addition of this borrowing to the government's totals increased the National Debt from £537 billion, or 37.7% of GDP to around 45%, breaking the so-called Golden Rule which sets the Public Sector Borrowing Requirement threshold at below 40%. The figure is the equivalent of £3,000 additional borrowing for every family in Britain. In the 2008 Budget, the Chancellor of the Exchequer announced that the government would issue £14 billion of gilts in order to cover the Northern Rock debt.
Handling of the crisis
On 26 March the Financial Services Authority released an internal report into the failings over handling the problems at Northern Rock. "They found that their supervision of the bank had not been carried out to a standard that is acceptable". The previous FSA review had taken place in February 2006. In the light of these failings at Northern Rock, the FSA announced that they would overhaul their own staffing and systems. The FSA internal report also concluded that ultimately the blame for the collapse of Northern Rock should rest with the bank's senior management. "The boards and managements of regulated firms carry the primary responsibility for ensuring their institutions' financial soundness," the FSA said. The British Bankers' Association (BBA), the UK banking body, agreed.
In May 2009 the Financial Times reported that banking regulators had been examining "war games" as early as 2004, which dealt with possible turmoil in the mortgage markets. HBOS and Northern Rock are thought to have featured in these predictions.
Commencing in October 2007, the All Party Commons Treasury Select Committee undertook a report into the failure of Northern Rock. The committee held several televised meetings, in which they called witnesses from the former Board of Northern Rock, the Bank of England, the Treasury and the regulatory bodies. The report was detailed, and concluded:
"The [former] directors of Northern Rock were the principal authors of the difficulties that the company has faced since August 2007. It is right that members of the Board of Northern Rock have been replaced, though haphazardly, since the company became dependent on liquidity support from the Bank of England. The high-risk, reckless business strategy of Northern Rock, with its reliance on short- and medium-term wholesale funding and an absence of sufficient insurance and a failure to arrange standby facility or cover that risk, meant that it was unable to cope with the liquidity pressures placed upon it by the freezing of international capital markets in August 2007. Given that the formulation of that strategy was a fundamental role of the Board of Northern Rock, overseen by some directors who had been there since its demutualisation, the failure of that strategy must also be attributed to the Board. The non-executive members of the Board, and in particular the Chairman of the Board, the Chairman of the Risk Committee and the senior non-executive director, failed in the case of Northern Rock to ensure that it remained liquid as well as solvent, to provide against the risks that it was taking and to act as an effective restraining force on the strategy of the executive members."
Prior to the subprime mortgage crisis the bank was part of the FTSE 100 Index, but was demoted back to the FTSE 250 in December 2007. The shares were later delisted.
On 31 March the bank released its annual report for 2007, it showed a loss of £167 million. The former boss, Adam Applegarth received a £760,000 (£63,333 a month) payoff. The report also outlined further details of their proposed business plan.
On 5 August the bank announced that it had made a loss of £585.4m for the first 6 months of the year and that £9.4bn of a loan from the Bank of England had been paid back, reducing the amount owed to £17.5bn.
Takeover offers
Virgin
On 12 October 2007, Virgin Group announced that it intended to bid for Northern Rock as the lead partner in a coalition including American giant AIG, turnaround specialist WL Ross and First Eastern Investment. Had the deal been successful, Northern Rock would have been integrated into Virgin Money as Virgin Bank.
It is unclear what role partners would have had in the deal. This bid was later approved by HM Treasury and had been noted as the preferred option. Virgin announced that Peter McNamara, a former Alliance & Leicester managing director, would be responsible for risk management at Northern Rock if its bid succeeds.
Other bidders
The other front-runner was an investment company Olivant, headed by the former chief executive of Abbey, Luqman Arnold. Olivant would have kept the Northern Rock brand. By 17 November, a total of ten companies had put forward proposals for the bank. Among the other suitors for Northern Rock were private equity firm Cerberus, JC Flowers and Lloyds TSB. In early December JC Flowers dropped out of the bidding.
Bids rejection
Northern Rock announced that all offers had been "materially below" the previous trading value. Alistair Darling said on 19 November that the Government would have to approve or veto any sale, in the interests of taxpayers, depositors and wider financial stability.
Possible nationalisation
In December the government prepared emergency legislation to nationalise the bank, in the event that the takeover bids fail. On 12 January 2008, the Treasury recruited Ron Sandler, the former Lloyd's of London Chief Executive, to lead Northern Rock, in the event that the bank was nationalised. If the bank was to be temporarily nationalised, the government would manage the bank at "arm's length" on a commercial basis, where services for savers and borrowers would not be affected and the company would continue to operate as normal. However nationalisation would also address the future of the Northern Rock Foundation. Alistair Darling rejected the possibility of the bank being put into administration.