Essay: Banking Obligations

Sample Essay

As the bank obviously did not have the liquidity to meet all the obligations at once, it had to wait for the government to bail it out. This was the first bank run in theUnited Kingdomfor over a century. Another feature that contributed to this was the ability of the bank to borrow from the interbank market or the money market (The Sunday Times, 2009).

This is known as liability management and it allowed the bank to carry fractional reserves as it could borrow from the markets if something akin to a bank run started, provided it was solvent. However, the financial crisis took that option out of the question just when it was needed the most as the credit crunch that ensued resulted in institutions and lenders not wanting to extend credit which led to Northern Rock not being in a position to satisfy its liabilities (Telegraph, 2007).

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