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Explanation:
The failure of Northern Rock can be traced down to two key things: (I) excessive funding of long-term assets using short-term finance and (II) a sudden loss of market confidence.
A is incorrect: The bank’s growth was strongly anchored in the originate-to-distribute business model where it raised money through securitizing mortgages and selling covered bonds.
B is incorrect: Unlike many of its peers, the bank did not rely on customer deposits for funding. Instead, it borrowed heavily in the international money markets, particularly within the interbank market.
C is incorrect: It was actually the news that the Bank of England was considering a range of rescue alternatives that triggered the run. The plans leaked, immediately triggering a loss of market confidence and setting in motion a run on deposits between September 14 and September 17
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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.