The views expressed in the contents above are those of our users and do not necessarily reflect the views of MailOnline. Case Study: Northern RockThe UK bank Northern Rock was originally a mutual savings-and-loan organization, with no shareholders, that had operated for over a century when it turned itself into a bank in 1997.
Figure 3 shows the change in its credit default swap (CDS) price during the bank’s last few months.
Following the US subprime crash in July 2007, the quality of Northern Rock’s asset pool became the subject of rumors circulating in the interbank market, and banks began to reduce the term and size of their interbank lines. Meeting the Requirement of Basel III Liquidity Structural MetricsBasel III enshrines the new risk approach in formal regulatory law with two new structural risk metrics, one for short-term and one for long-term funding. For commercial bankers, the impact of the LCR requirement is to incentivize a lower reliance on wholesale funding and a greater share of stable customer deposits as a percentage of total balance-sheet funding.
RelatedBest PracticeCorrecting the Financial Crisis Failures of Asset-Liability Management (ALM) Risk Managementby Jerome L.
Helena Morrissey CBE, CEO of Newton Investment Management, is incoming chairman of the IMA, the asset management industry trade body whose members collectively oversee "about" five trillion pounds.
Some 152,000 former customers of defunct bank Northern Rock are to receive an average of £1,775 in compensation following a paperwork error.
Northern Rock Asset Management (NRAM), the state-owned remnant of Northern Rock, will pay out £270 million in refunded interest after the bank failed to make mandatory disclosures in customer letters since 2008.
UK Asset Revolution, NRAM's holding company, will contact potentially affected customers in writing with further information in the next few days. Speaking at Treasury questions, Chancellor George Osborne said customers who had loans below £25,000 were affected and blamed "an error originating in 2008 when Northern Rock was in public ownership".

He told the Commons: "Some customers with certain types of mainly unsecured personal loans were not given all the mandatory information in their statements which they were entitled to by law. UK Asset Revolution (UKAR) identified certain loans where the documentation was not compliant with Consumer Credit Act (CCA) requirements. UKAR chief executive Richard Banks said: "NRAM is acting in accordance with its legal responsibilities and we are determined to do the right thing for customers and the taxpayer.
Alongside the change in type of legal entity came a change in business philosophy, one that emphasized aggressive asset growth.
One day in September 2007 the bank was not able to roll its overnight funding and turned to the Bank of England, the lender of last resort. On the face of it, these represent a step change in liquidity management culture, but that is only because principles accepted as commonplace in the 1860s or 1960s had been discarded by 2008.
Nevertheless, for many banks they will prove a challenge to work toward.The critical short-term metric is the liquidity coverage ratio (LCR). However, more prudent banks will restrict their liquid asset buffer (LAB) to cash at the central bank and AAA-rated Treasury bills and sovereign bonds.The objective of this metric is to promote short-term resilience to liquidity shocks. However, its retail deposit base was still confined to its original home area in the northeast of England, so the new loans were funded by recourse to the wholesale market. This news led to media headlines the next day, such that there was a run on high-street banks—the first in the United Kingdom for more than 100 years.
Setting a limit for it, and requiring banks to hold a stock of sufficient high-quality, genuinely liquid assets results in a more stable funding regime that will be less susceptible to a freeze in interbank markets of the kind observed in October 2008.In other words, the LCR requirement results in banks having to maintain a liquidity buffer that matches expected cash outflows in a stressed environment. Given that Morrissey is famous for setting up the 30% Club to get more gender diversity onto boards, I expected us to have a chat about diversity in the asset management industry.

Figure 2 shows the growth in wholesale and capital market funding as a share of its total balance-sheet liabilities during the 10 years from its transformation to its ultimate demise and government bailout.
Stable retail customer deposits such as current account balances have the lowest outflow assumptions, while short-dated wholesale market funds have the highest outflow assumptions. The amount of funds that might be observed in a market stress situation is given by the stress tests that banks run every month, under specified assumptions. The NSFR is typically used to monitor and control the level of dependency on volatile, short-term wholesale markets as a key structural balance-sheet ratio. This implies that a stressed environment would last for only a month, which is unrealistically short. Figure 4 shows the difference in gap profiles at a UK commercial bank when the contractual gap profile is compared with the behavioral gap profile for customer loans and deposits. For this reason some regulators, including the United Kingdom’s Prudential Regulation Authority (PRA), impose a 90-day time period over which the stress would be assumed to take place.Are the stress tests themselves reliable?
In other words, maintaining an adequate NSFR should help considerably in ensuring a stable funding structure because more of a bank’s liabilities will consist of longer-dated funding. Any analysis undertaken under assumed conditions is always at risk of inaccuracy, which is why continuous review and back-testing are also part of a bank’s risk management regime. Longer-dated liabilities cost more than short-dated liabilities, and in a stressed environment these are difficult to raise.

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