Northern Rock
Northern Rock, formerly the Northern Rock Building Society, was a British bank. Based at Regent Centre in Newcastle upon Tyne, United Kingdom, Northern Rock was originally a building society. It demutualised and became Northern Rock bank in 1997, when it floated on the London Stock Exchange with the ticker symbol NRK.
During the early 2000s the company borrowed substantially to fund mortgages, with the aim of ambitious growth, and also donated large amounts to charitable purposes and communities directly and through sponsorships. Due to the 2008 financial crisis, it was unable to produce income as expected from its loans, and was at risk of being unable to repay the amounts it had borrowed. The news that the bank had approached the government for support with its liquidity led within 24 hours to a public lack of confidence and concerns that savings were at risk, and the bank failed following a bank run as people rushed to withdraw their savings. It was the first British bank in 150 years to fail due to a bank run.
Unable to find a commercial buyer or secure the further government support needed, it was taken into public ownership in 2008, as an alternative to insolvency. By that point the government had extended liquidity support of tens of billions of pounds to Northern Rock. An inquiry concluded that the board had failed to properly protect the bank from the risks inherent in its strategy, or to restrain the executive directors where required, therefore although the bank had sufficient assets, it had become vulnerable.
The branch operations were eventually returned to private ownership when the branches and other retail operations were acquired by Virgin Group in 2012, being rebranded as Virgin Money the same year. The mortgage book of higher risk assets was renamed Northern Rock and later "NRAM plc", and remained in public ownership until it was sold to Cerberus Capital Management in 2016.
the Northern Rock Shareholder Action Group are continuing their campaign to obtain compensation for the shares that were taken over by the Government when the bank was nationalised during the 2008 financial crisis.
History
Northern Rock Building Society was formed in 1965 by the merger of two North East of England building societies, both of which were based in Newcastle-upon-Tyne: the Northern Counties Permanent Building Society and the Rock Building Society. During the following 30 years, Northern Rock expanded through the acquisition of 53 smaller building societies, most notably the North of England Building Society in 1994.Along with many other UK building societies in the 1990s, Northern Rock chose to demutualise as a building society and float on the stock exchange as a bank. Throughout this period an argument against demutualisation was that the assets of a mutual society were built up by its members throughout its history, not just by current members, and that demutualisation was a betrayal of the community that the societies were created to serve. Northern Rock chose to address these concerns by establishing the Northern Rock Foundation, which funded community-based projects. At its Stock Exchange flotation on 1 October 1997, Northern Rock distributed shares to members with savings accounts and mortgage loans; the flotation share price was £4.52.
In 2000, it was promoted to the FTSE 100 Index. After the 2007 crisis, it was demoted to the FTSE 250 in December of that year.
On 14 September 2007 the bank sought and received a liquidity support facility from the Bank of England, following problems in the credit markets caused by the 2008 financial crisis. The bank was more exposed than others to restrictions in the supply of credit because of the way it had funded its expansion. It had borrowed short term on the wholesale money markets and lent long term for mortgages on property. This was a policy well known to cause failures when short-term interest rates rose above long-term rates and insufficient hedging was in place.
The bank was nationalised at 00:01 on 22 February 2008 following two unsuccessful bids to take over the bank, neither being able to fully commit to repayment of taxpayers' money. In doing so, the Government effectively took ownership of the insolvent institution away from its shareholders, without reimbursement. The media reported cases where some shareholders had their life savings in the shares, which were taken from them.
A substantial reduction in the staff was announced in 2008, with 800 people made compulsorily redundant in July of that year, and another 500 taking voluntary redundancy. The bank planned to make another 700 redundant by 2011.
On 1 January 2010 the bank was split into two parts, assets and banking. In June 2011 the bank was officially put up for sale back to the private sector, and on 17 November 2011 it was announced that Virgin Money was going to buy Northern Rock plc for £747 million up front and other potential payments of up to £280 million over the next few years. The sale went through on 1 January 2012. The government said it had no plans to sell Northern Rock and there would be no further job losses, except for those already announced. Virgin also pledged to keep the headquarters of the bank in Newcastle upon Tyne. The combined business now operates under the Virgin Money brand.
On 12 October 2012 Northern Rock plc was renamed Virgin Money plc, and Virgin Money Limited was renamed Northern Rock Limited.
In 2024, Nationwide Building Society bought Virgin Money, and aims to rebrand the business by 2030.
2007 crisis and nationalisation
Background
Under non-executive chairman Matt Ridley and Chief Executive Adam Applegarth, Northern Rock had a business plan which involved borrowing heavily in the UK and international money markets, extending mortgages to customers based on this funding, and then re-selling these mortgages on international capital markets, in a process known as securitisation. In 2007, there was much press attention given to the growing crisis due to subprime mortgage lending, particularly in the United States. Amid the resultant unease by August 2007, global demand from investors for securitised mortgages had fallen away, and Northern Rock was unable to raise funding by selling its securitised loan books, and therefore became unable to repay short-term loans from the money market.2007 crisis and initial responses
On 14 September 2007, the bank sought and received a liquidity support facility from the Bank of England, to replace funds it was unable to raise from the money market. Reporting of this complex scenario led to panic among individual depositors, who feared that their savings might not be available should Northern Rock go into receivership. The result was a bank run – the UK's first in 150 years – where depositors lined up outside the bank to withdraw all of their savings as quickly as possible, particularly since many other people were doing the same.As the UK government provided the liquidity support facility, they also exerted pressure on the bank to create a longer-term recovery plan. Over the next few months, there were numerous changes to the board of directors and executive team.
On 19 October, chairman Matt Ridley resigned and was replaced by Bryan Sanderson, a former Managing Director of BP. Chief Executive Adam Applegarth's resignation was then announced in mid-November, with the caveat that he would remain with the group until it established independent funding or was purchased. Four non-executive directors, Sir Derek Wanless, Nichola Pease, Adam Fenwick and Rosemary Radcliffe also resigned. A month later, Applegarth left and former Marketing Director, Andy Kuipers, was appointed Chief Executive.
Notably, Dave Jones, the Group Finance Director through the crisis, had only been in his role since the retirement of Bob Bennett in January 2007. Alongside Applegarth, Bennett had been one of the architects of the bank's flotation in 1997 and its subsequent substantial growth. He had been wary of its continued aggressive growth strategy, which would continue up until summer 2007, despite the increasing volatility in the markets on which Northern Rock relied. Commentators later suggested that with Bennett's retirement, the executive board was dominated by Applegarth. A report by the Financial Services Authority conceded in February 2008 that it had been wrong to consider Northern Rock low risk, and as a result had given the company too little scrutiny.
The group was criticised when it emerged that they had begun to pay in excess of 150 senior staff members substantial retention bonuses. Northern Rock hoped the bonuses would enable them to retain critical staff members at risk of being poached by other companies. It had previously been criticised in 1998 when the pay of the executive team that led the flotation was 40% higher in the year following.
In late 2007, Virgin Money was named as the preferred bidder for the group, with Olivant Group later beginning talks around takeover.
Nationalisation
On 22 February 2008, the bank was taken into state ownership as a result of two unsuccessful bids to take over the bank, neither being able to fully commit to repayment of taxpayers' money within three years. The bank was managed at "arm's length" by the government through UK Financial Investments.The bank planned to repay the government debt within three to four years, primarily by encouraging mortgage customers to take their mortgage to another lender. Costs were also reduced by reducing numbers of staff. As of 3 March 2009, the bank was repaying the loan well ahead of target, owing a net balance of only £8.9 billion of the loan which stood at £26.9 billion at the end of 2007.
By October, customers appeared to be regaining confidence in the bank, when it emerged that there had been a surge in the number of new accounts which had been opened. People perceived Northern Rock as a safe place to put their money, given that it was currently government owned. However, there was no guarantee that if Northern Rock was to fail that the government would top-up any compensation over and above the standard £85,000 offered by the Financial Services Compensation Scheme.
Former shareholders and hedge funds also took legal action in January 2009 to get compensation for their shares; the shareholders lost the case. They also lost their appeals in the British courts, but hoped to take the case to the European courts. However, on 8 December 2009, it was announced that the valuer Andrew Caldwell had decided that the Northern Rock shareholders should get no compensation.
On 23 February 2009, Northern Rock announced that they would be offering £14 billion worth of new mortgages, over the next two years, as a part of their new business plan. This new lending was partly funded by an increase in the government loan and a reversal of previous strategy to pay the loan off as quickly as possible by actively encouraging mortgage customers to leave when their mortgage deal matured. The reason for this change was government policy to increase the availability of credit. This £14 billion was to be split into £5 billion in 2009 and £9 billion in 2010.
Potential buyers for the bank included Virgin Money, National Australia Bank, NBNK, Santander, Blackstone, Tesco, TowerBrook, Yorkshire Building Society and Coventry Building Society. Former Chancellor of the Exchequer Alistair Darling had stated that he was in no "hurry" to return the bank to the private sector.
The bank was split into two parts, assets and banking on 1 January 2010. On 15 June 2011, it was announced that the bank was to be sold to a single buyer in the private sector by the end of the year. On 22 March 2011, the bank issued its first mortgage securitisation since the 2007 recession which nearly brought the bank down.