Explanation:
Northern Rock failed largely due to a loss of market confidence. It relied heavily on short-term wholesale funding rather than customer deposits to fuel its aggressive mortgage lending, which followed an originate-to-distribute model via securitization. When the wholesale markets froze in 2007, it faced severe liquidity issues. Furthermore, the bank run happened after news leaked that it had requested liquidity support from the Bank of England (which actually granted the support), triggering a panic among depositors due to the loss of confidence.
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Q.94 Which of the following statements is most likely correct with regard to the liquidity crisis at Northern Rock in 2008? Northern Rock:
A
Adopted the originate-to-keep model where it offered mortgages to facilitate ownership and would proceed to keep these assets on the balance sheet until maturity.
B
Northern Rock relied heavily on customer deposits to fund its engagements in the securitization market.
C
Experienced a run on deposits after news broke that the bank of England had refused to come to the bank’s rescue.
D
Failed in part due to a loss of market confidence.
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