Historical BackgroundIn 1965, Northern Rock Building was founded in Newcastle from the merger of Rock Building Society and Northern Counties Permanent Building Society. After the foundation, to pursue expansion Northern Rock Building Society went through merger and acquisition with 53 different societies and became one of the most competitive building societies. Around the mid-1990s, Northern Rock decided to demutualize to be listed on the London Stock Exchange, and as a result, it became a public limited company on October 1st, 1997. However, there were some concerns for the demutualization of the society such as its assets which were accumulated throughout history by the former members and perception of demutualization as a betrayal to the community that the society was meant to serve. Therefore, as a contingency to relieve these concerns a charitable foundation called Northern Rock Foundation was established to support the local community. The Northern Rock Foundation agreed to rece Northern Rock, starting on September 15th of 2007, hundreds of individual customers queued in line outside numerous Northern Rock branches to withdraw their money. As a result of the bank run, the banking system of Northern Rock was undermined, and its reputation plunged to the ground. In realization of the severity of the situation, the government intervened to put an end to the crisis on September 17th of 2007, by ensuring that deposits held by Northern Rock will be guaranteed. Due to the underperforming conditions and pressures, Northern Rock announced on September 25th of 2007 that it will cancel the dividend which was to be paid to the shareholders in October. On the same day, Northern Rock also confirmed that it is in preliminary communication with parties who will be willing to purchase its business. On October 9th of 2007, the government decided to provide a guarantee for the new saving deposits at Northern Rock.In order to repay the supporting loans from the Bank of England, ial demands. It focused on increasing mortgage loans to homeowners by gaining loans from the international wholesale market and selling these mortgages back to the market. As a result, it was not able to convert the mortgages to cash without a loss of income or capital in the process (Philip E. Strahan, 2012). Also, Northern Rock asked Bank of England for financial assistance and its share price dropped 32% in a day, causing the decrease in reputation of the bank. As a result, customers wanted to retrieve their deposits in the bank and investors were reluctant to invest in the bank. Therefore, outflow of deposits and exposure to the wide range of lending were contributing factors of the demise.Credit RiskNot only Northern Rock, many other financial institutions suffered from the lending risk during the subprime crisis. However, as Northern Rock was very aggressive in lending loans to mortgage borrowers, it suffered greatly from the loss when the borrowers failed to repay the full loane, when the situation just started, they could have demanded reports on the current damage and potential loss that might be realized in different future scenarios. These active actions were crucial and just believing that the company would recover could have led to worse situations just like Dennis Grainger who was interviewed by the financial times as one of the shareholders of Northern Rock who suffered a great loss by just trusting that the company will recover from the crisis (Dunkley, 2017).Potential InvestorsPotential investors when deciding to invest in the share should investigate and analyze the reasons why the price of the share has dropped. Before investing in Northern Rock which decreased in share price, potential investors could have analyzed the reasons to anticipate whether there would be further damage to the company and would lead to further drop in the share value. The reasons for the drop in share price should be carefully studied to conclude whether its impact has ales and products should be managed and identified with care. They should adhere to the corporation’s risk management policies and approval from the Board should be sought. Secondly, credit granting needs to be conducted seriously. Certain criteria need to be set for loan lending, thorough understanding of the reason why the loan is needed, the borrowers’ abilities to repay the loans and their sources of repayment. Northern Rock ignored these issues and over-extended its lending range thus directly causing its downfall. Thirdly, credit measurement and administration need to be strengthened. Credit risk-bearing portfolios need to be monitored regularly. Risk-rating systems which are consistent with the corporation’s risk nature needs to be developed and adopted to determine the credit risk case-by-case.ConclusionThorough information about the background of Northern Rock and its downfall, the reasons why it faced such problems and the measures to prevent future occurrence of the problems h
