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Financial institutions with significantly larger subprime mortgage portfolios therefore faced difficult situations in managing the losses and consequently went out of business owing to large losses sustained as a result of mass scale defaults by subprime borrowers.
There are various reasons as to why financial institutions failed and consensus have now emerged that it was the failure of financial regulatory system of developed countries that resulted into the excessive risk taking by financial institutions. This excess risk taking therefore resulted into the failure of some financial institutions. What is also critical is the fact that systematic failure of financial institutions created negative impact on the economy and system as a whole experienced bank runs also.
Northern Rock was one of the glaring examples of the failure of financial institution resulted due to imprudent risk management policies and practices. This paper will therefore provide an in-depth overview of the failure of Northern Rock and whether it was due to failure of regulatory agencies?
It is generally believed that the financial crisis started as a result of subprime borrowers who failed to pay on their obligations when they became due. Subprime borrowers are those borrowers who normally do not fall into the acceptable category of borrowers due to their poor credit history. However, subprime borrowers also offer an opportunity to financial institutions to earn higher returns because of their high risk and most of the financial institutions jumped on this opportunity and started to lend in subprime market extensively.
Most financial institutions however, also securitized their mortgage portfolios including subprime portfolios in order to recoup their liquidity drained as a result of lending to subprime borrowers. Most of financial institutions however, found themselves in trapped in this complex web as their repayment capacity against mortgage baked securities was