Consider the corporate governance arrangements affecting Northern Rock up to the crisis in September as detailed above.a) Write an objective report for the government detailing how and why the governance arrangements may have assisted in the failure of Northern Rock.b) Describe the ways in which the governance arrangements noted above fulfil the current version of the UK Corporate Governance Code.c) Comment, detailing your reasons, on whether such a major banking failure is likely to occur again.
Northern Rock plc Northern Rock, originally a building society, became a bank in 1997 and floated on the Stock Exchange. It became a member of the FTSE100 in 2000 and was ranked in 2007 as the UK’s fifth largest mortgage lender but was the seventh largest retail bank in terms of net assets. In September 2007 it experienced the first run on a bank (customers trying to get their money out en masse) since the 1850s in the UK. PwC audited the 2006 accounts and gave a clean bill of health. This meant that there was no presumption that the company would stop trading and there were no concerns about accounting practices that were material enough to be reported. In the aftermath the House of Lords Economic Affairs Committee carried out a review and decided that the auditors had been ‘complacent’ and their lack of liaison with the banking regulators had been a ‘dereliction of duty’: ‘There was no single cause of the banking meltdown of 2008 09. First and foremost, the banks have themselves to blame. As our predecessor Committee found in its report on Banking Supervision and Regulation in 2009, the supervisory system put in place in 1997 proved unfit for purpose. But we conclude that the complacency of bank auditors was a significant contributory factor. Either they were culpably unaware of the mounting dangers, or, if they were aware of them, they equally culpably failed to alert the supervisory authority of their concerns. Our recommendations are designed to address these failings and thus make a repetition less likely.’ (Quoted from the House of Lords report March 2011) In July 2007 the Chief Executive, Adam Applegarth was published on the Northern Rock website (interim report for 2007) as saying: “Operationally Northern Rock had a good first half in 2007. Mortgage lending has been particularly strong with a gross market share of 9.7% and a net market share of 18.9%, helped by improvements in retention of home moving customers, keeping customers coming to the…
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