Share Prices & Company Research


14 September 2017

The first domino to fall

It was among the defining images of the global financial crisis. On 14th September 2007, thousands of worried Northern Rock customers lined up outside their local branches in a desperate attempt to rescue their savings after hearing the institution was in trouble and seeking emergency help from the Bank of England (BoE).

Northern Rock went from being a FTSE 100 company and the nation’s fifth-largest mortgage lender to the first British bank since 1866 to undergo a bank run, leading to its collapse.

Neil Burniston, Investment Manager at the Middlesbrough branch of investment management and stockbroking firm Redmayne-Bentley, remembers the time well. He said: “They were a victim of global events, but they also flew too close to the sun. The factors that affected the banking industry nationally and internationally affected them more acutely, and they were the first domino to fall.”

Northern Rock’s business model had made it more vulnerable to the impending global crisis than other institutions. Over the previous few years, it had borrowed heavily in UK and international markets to fund mortgages, offering customers mortgages based on this funding, and then re-selling these mortgages on to investors around the world. However, the start of the world banking crisis put it at risk of being unable to pay back what it had borrowed.

The announcement that Northern Rock was seeking help from the government saw its shares fall 32 per cent that day. Neil said: “At the time it all started to unravel, we had people buying and selling the shares at the same time as people were queuing to get their money out of the bank.

“We knew that Northern Rock had gone to the Bank of England for help, as it had been on the 10 o’clock news the night before. Selling the few shares we held in Northern Rock managed accounts was the best decision we could have made. That was when having portfolio management really paid off. We grasped the nettle, made the decision and moved on.

“Our office was in the centre of Middlesbrough at the time and we saw the share prices tumble on the screen. One of our colleagues went out to get a sandwich at lunchtime, came back and said they were queuing down the street outside the Northern Rock branch.  That made our mind up for us. At that point, we knew we couldn’t sit and wait in the hope it would pass because it clearly wasn’t going to. It crystallised our thoughts and made us realise early on that this was going to be more than a temporary setback.”

In December 2007, Northern Rock dropped out of the FTSE 100, its shares having fallen from above £12 at the start of 2007 to less than £1. After two failed takeover bids, the bank was taken into public ownership in February 2008 in what the then Chancellor, Alistair Darling, said would be a temporary measure. It wouldn’t return to the private sector until 2012.

The 2008 financial crisis had a devastating impact on banking institutions once seen as invincible. US subprime lender Lehman Brothers filed for bankruptcy on 15th September 2008. On 17th September, Lloyds TSB announced a £12bn deal to take over HBOS after a run on HBOS shares. Later that month, the government took over Bradford & Bingley's £50bn of mortgages and loans, with savings operations and branches sold to Santander.

Neil said: “Northern Rock’s collapse was the first of a number of days like that, as over the next year we had Lloyds TSB, Abbey National, Royal Bank of Scotland dropping sharply in value, and other banks going the same way.”

Following the 2008 crisis, the 2013 Financial Services Act made major changes to the way financial institutions are regulated. The Act gave the BoE responsibility for overseeing the UK financial system as a whole, and the Financial Conduct Authority was established to protect customers and ensure that business across financial services and markets is conducted in the interests of all users and participants.

Neil added: “The banking industry is much more resilient now. However, people have short memories in finance, the signs are that people are starting to forget how painful that period was.

“Everything goes in a cycle. As soon as people forget about the last crisis, they move towards the next one. The regulatory changes have made the industry stronger, but we won’t know how strong it is until the next crisis.”

The first domino to fall
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