Abstract for: Northern Rock plc: A case study in banking policy during times of duress

This paper explores the events that engulfed Northern Rock plc, a UK publicly listed company, during the latter part of 2007. The background to those events that took place is illustrated together with their consequences for Northern Rock. A model of the Northern Rock liquidity situation is produced and tested using the System Dynamics paradigm and methodology. The resultant model is verified and validated with reference to known behaviour and data. Hypotheses are constructed resulting in conclusions which centred on the need for co-operation between the Tripartite Authorities and Northern Rock together with a need for active, coordinated management action. Within the limitations of the model different means of coping with banking credit problems are illustrated and remedies postulated. The model presented could be further developed to produce recommendations for automatic triggering of interventions. A variant of the model could be adapted to model contagion risk. These, together with others, are areas for further work. Methodological conclusions are that the model correctly exhibits linear behaviour if not actively managed, that the model contains both continuous and discrete elements, that there is scope within the model to adapt it for use as a teaching/study aid in finance and/or System Dynamics.