In 2008 the Northern Rock bank was nationalised by the British government, due to financial problems caused by the subprime mortgage crisis. In 2010 the bank was split into two parts (assets and banking) to aid the eventual sale of the bank back to the private sector.
On 14 September 2007, the bank sought and received a liquidity support facility from the Bank of England, as a result of its exposure in the credit markets, during the 2008 financial crisis. On 22 February 2008 the bank was taken into state ownership. The nationalisation followed two unsuccessful bids to take over the bank, neither being able to fully commit to repayment of savers' and investors' money.
In 2012 Virgin Money completed the purchase of Northern Rock from UK Financial Investments (UKFI) for approximately £1 billion and by October of that year the high street bank operated under the Virgin Money brand.
2007 credit crisis
Emergence
On 12 September 2007, Northern Rock asked the Bank of England, as lender of last resort in the United Kingdom, for a liquidity support facility due to problems in raising funds in the money market to replace maturing money market borrowings. The problems arose from difficulties banks faced over the summer of 2007 in raising funds in the money market. The bank's assets were always sufficient to cover its liabilities in the long run, but it had a liquidity problem because institutional lenders became nervous about lending to mortgage banks following the US sub-prime crisis. Bank of England figures suggest that Northern Rock borrowed £3 billion from the Bank of England in the first few days of this crisis.
Government intervention
With shares in Northern Rock plummeting by nearly a third, the British Government moved to reassure investors with the bank, with account holders urged not to worry about the bank going bust. The Treasury select committee chairman John McFall MP said: "I don't think customers of Northern Rock should be worried about their current accounts or mortgages."
Northern Rock was not the only British bank to have called on the Bank of England for funds since the sub-prime crisis began but is the only one to have had emergency financial support from the Tripartite Authority (The Bank of England, the FSA and HM Treasury). However, the bank was more vulnerable to a credit crunch as its 'high risk' business model depended on funding from the wholesale credit markets, 75% of its funds coming from this source. In his address to the Treasury Select Committee, Bank of England governor Mervyn King had stated emergency funds would be made available to any British bank that needed it, but at a penalty rate, to ensure that lenders who had made bad lending decisions would suffer relative to lenders who had made sensible lending decisions.
In December, the EU regulators approved Britain's actions to provide aid to the bank by concluding that it was in line with European emergency aid rules.
Run on the bank
On Friday 14 September 2007, the first day branches opened following the news, many customers queued outside branches to withdraw their savings (a run on the bank). This bank run was not the traditional form, where depositors withdraw money in a snowball effect, leading to a liquidity crisis; instead, it occurred in the aftermath of the liquidity crisis. It was estimated that £1 billion was withdrawn by customers that day, about 5% of the total bank deposits held by Northern Rock.
On Monday 17 September, as worried savers continued to flock to some Northern Rock bank branches to withdraw their savings, it was reported that an estimated £2 billion had been withdrawn since the bank applied to the Bank of England for emergency funds. By early afternoon in London, Northern Rock's shares, which had lost 32% on the previous Friday, fell a further 40% from 438 pence to 263 pence.
Later that day, the Chancellor of the Exchequer, Alistair Darling, announced that the British Government and the Bank of England would guarantee all deposits held at Northern Rock. Northern Rock shares rose by 16% after this was announced.
Stabilisation
The announcement by the chancellor showed its intended effects the next day, as the queues outside Northern Rock's branches gradually disappeared. In addition, Northern Rock had a series of advertisements published in major UK newspapers to reaffirm that their customers' money was safe.
In an interview on BBC Radio 4, Bank of England governor Mervyn King revealed that they had anticipated emergency funding to be in the £20–30bn range.