Saturday, May 18, 2019
Crisis and Risk Management for Business Continuity: The Case of Northern Rock
a) Research problem The global frugal crisis has topped the m all discussions in the business world today. The current credit crunch is non only being felt in the get together States where the actual problem started but in the United Kingdom as closely, with to a greater extent companies feeling the pinch by the day. It is a pity that mevery businesses get to been decl atomic number 18d shorerupt following the shock imaged from the crisis. It is however nonable that the blame is partly on their side. The reason for this is that mevery businesses today wealthy person non b otherwiseed to set out up with crisis and run a gamble attention political platforms to shield their businesses from such shocks.They operate based on the current slips and pay little attention to disasters that argon resemblingly to affect the business and how these inst each up skunk be minimized. Even where attempts wipe give a way of life been made, crisis and encounter vigilance jut s do not fully reference point every the potential assays that be in all probability to face the keep company. other issue is that whenever the said crises occur, these envisions argon not properly pay back out so that they often demise up doing little to save the website. These characteristics perfectly fit the circumstances surrounding the fluidness crisis at Federal reel between 2007 and 2008. northern wave is a British depository financial institution that is flat infra worldly concern ownership following a politics bailout in 2008. The argot which started off as a expression society became a posit in 1997 when its shares were offered in the London Stock Exchange. As of folk 2008, the beach which is ranked as nonpareil of the top mortgage lenders in the UK employed 4500 employees. Until 2007, blue Rock was doing well and was considered nonpareil of the fastest growing savings banks in the UK at least based on its asset base. The current economica l crisis however sent the bank giant reeling as banks tightened their change grade.As if this was not enough, mount from covered bonds and the securitisation model which made up 75 portion of Union Rocks funds started deteriorating and eventually these markets closed simultaneously following the economic crisis. What followed was crisis after crisis as the bank threatened to go down. On September 2007, the Yankee Rock approached the Bank of England to request for a liquidness support facility to contain roughly of the problems it was facing following the credit crunch. This ca apply a bank run as customers rushed to withdraw their savings.The bank was overwhelmed and intervention by the state was necessary to save the bank giant. The UK financial Investment Limited now manages the bank at arms length for the government which was taken into government ownership in February 2008. northern Rocks inability to subscribe to with the crisis has been blamed on poor take a chance and crisis attention. b) Justification of the survey The near give way of northerly Rock is a wake up call to every business that intends to survive outgoing any kind of crisis.Business Management Study GuideThe misfortunes encountered by Northern Rock and the consequences of these should be a inviolable lesson for other companies to learn from by the implementation of danger and crisis instruction. The challenge however still form and unless the issue is addressed by giving managers a guide, another company could still go the Northern Rock way. This rent go away address this challenge effectively by revealing all that a manager ask to know more or less crisis and risk circumspection for business continuity. Three issues are at hand with each of them carrying square weight. Firstly, only a few companies undertake crisis and risk management.Secondly, the few of those who confine taken the initiative obligate not addicted it adequate attention. Thirdly, when the act ual crisis occurs, implementation of the set plan is not normally adhered to so that the essence of the plan is in fact dissolved. Other companies just like Northern Rock are unbrokenly at risk of disasters and wherefore the knowledge about how to deal with them is quite invaluable. The research which mainly aims at uncovering the dangers of not having a crisis management plan and how having one could save the companys futurity(a) and form a useful guide to business managers.c) Objectives of the hold. In order to batten that this research addressed the above problems while maintaining the scope of the study, the following objectives were used to guide the research. To establish whether Northern Rock had any crisis and risk management plans in place. To learn the importance of crisis and risk management plans. To suggest how Northern Rock could assume survived the crisis development crisis and risk management planning. Literature Review a) The Case of Northern Rock In t he second half of the 2007, Northern Rock became the first bank in the UK to experience a bank run since 1866 (Shin, 2008 2).World lenders balance sheets were already shrinking so that banks had reduced their lending and interest rates were going up following the credit crunch (Llewellyn, 2008 35-36). The credit crunch originated from the U. S sub-prime mortgages that led to a shortage in money open to banks for lending. The banks over-reliance on securitisation and covered bonds is considered the major cause of the of Northern Rocks downfall (Tevin, 2008 13). Securitisation is used to refer to the kind of funding where mortgages are used as trade nurseion to obtain loans from other banks (Shin, 2008 6).Being a prominent mortgage lender, the bank had quite a substantial amount of security. The mortgages were to a fault used to secure covered bonds which were a constant microbe of finance for the bank. These both types of markets made up 75 percent of the banks extension of fin ance and in that locationfore when they collapsed at the self very(prenominal)(prenominal) quantify, the banks cash in hand were threatened (Victoria, 2006 2). On the other hand, banks were shrinking their lending rates and therefore the bank could not spread out to pay up its dues and generate its mortgage lending.An innovation unique to the bank is withal associated with the downfall. Northern used model that they referred to as originate to distribute in which they could take loans and then treat them to other investors ahead they matured such that they obtained spare funds and the liability of the loans was transferred to the investors (Tevin, 2008 15). As a result of the credit crisis, the bank could not sustain its financial needs and consequently could not meet market learn. North Rocks mode of funding is described by Shin (2008 8) as an unusual business model. trance banks are expect to have customer deposits as their major liabilities, Northern Rock operated on securitised loans which they offered as mortgages to their customers. Long-term loans which they repaid using the payments paid by mortgage beneficiaries were used to pay -up the loans (Llewellyn, 2008 37-38). The mortgages were also used as security for additional loans. Deposits only accounted for 23 percent of the finances held by the bank (Tevin, 2008 14). Given that banks heavily rely on deposits as their major assets and source of financing, the amount available was extra when loans could not provide for the required amounts.Attempts to sell off the bank were unsuccessful because no investor wanted to risk fetching up an endangered bank (Adams, 2008 1). The bank obtained the government bailout from the Bank of England in form of emergency funding (Adams, 2008 1 Laughton, 2008 1). This was through in the knowledge that collapse of Northern Rock could cause a major shake-up in the banking fabrication (Laughton, 2007 1). The news on Northern Rocks bailout caused a bank run and depositors rushed to withdraw their money. At the same cadence, the share prices fell by 31 percent (Lastra, 168).b) Crisis and Risk Management. Crisis and risk management is a ordinarily ignored function of the management but which can p arrange a significant role in determining the destiny of a company. Reliable studies reveal that most organisations do not take crisis and risk management seriously such that they do not put aside plans meant to counter unexpected crises (Robert and Lajtha, 2002 184). correspond to McConnell and Drennan (2006 62), the reason for this is that the probability of occurrence of crises is low within most business environments such that managers find no reason to use the companys resources to invest in countering risks that may never see anyway.This notion is however unconventional because no organisation is immune to crises and risks in the course of its operations. Yemen (2001 65) notes that crises and disasters carry no warning and consequently invariably catch businesses unaware. Before they can react to the crisis by getting effective solutions, the damage is already done and chances of survival are passing minimized (McConnel and Dreannan, 2006 60). For this reason, it is inevitable for every company to consider crisis and risk management in their strategic plan.Salter (1997 60) defines crisis and risk management as the act of coming up with policies and procedures to be used to identify, analyse, treat and monitor risk. It is a guide on how to deal with crises and risks should they occur and how to obtain from their effects (Pingeone, 2006 37). The procedure of risk management involves the identification of areas where the company foreknows that things may go wrong (Lee et al, 2007 335). This could fall in any department of the organization. While some may be general, some risks are much promising to occur in one company than in another depending on their operations (Robert and Lajtha, 2002 184)Crises and risks a re invariably occurring in the business management and it is hard to predict what will happen the following day. While risks are used to represent threats or possibilities of an occurrence of misfortunes, the term crisis is used when the actual misfortune actually occurs (Lagadec 1997 28 Shrivatsava, 1988 284). Physical disasters such as fires, terrorist attacks, phishing attacks, floods among other disasters are among the major kinds of crises. These should however not form the fix focus of the company because they the business is bound to face many external and economic forces that could influence its performance.For example, relying on one source for supply of materials could lead to a crisis if this supplier can no longer make the supplies to the company (Pingeone, 2006 100). It is therefore essential that a company makes such a consideration when determining the future of the business. This is actually what happened to Northern Rock who had relied on securitisation and long- term loans as their source of finance so that when banks could not lend as much as they demanded, they were left desperate with no other major source and hence had to turn to the government for attend to. ) Crisis and Risk Management Plan Crisis and risk management plans help to lay down the steps to be taken in the event of a crisis and in keeping the various(a) risks that a company is exposed to at bay. In coming up with a crisis and risk management plan, the company ought to identify any possible risks that it is likely to suffer in the course of its operations (Alderman, 2008 149 McMillan, 2006 89). These risks are then assessed so as to come up with plausible ways of addressing them whenever they arise. This is known as do plans for post crisis actions (Alexander, 169-171).Crisis and risk management plans ensure that every employee participates in the companys safety precautions while ensuring that risks and crises are handled in the right manner. Designing the Crisis and Ri sk Management Plan It is notable that most companies have not tho put a risk and crisis management plan in place (Carmeli and Schaubroeck 2008 182). This mostly stems from the fact that managers stress to be optimistic hoping that no disaster will occur. In other circumstances, they precisely wish to obviate the unnecessary expense on something that might never happen.There are however those who are simply ignorant and do not know how to go about implementing a plan. Further still, once the crisis and risk management plan is put in place, its implementation is often a challenge when the actual risk occurs. This is brought about by the panic that often characterises a crisis. Pingeone (2006 99) notes that the management plan should be followed to the letter unless the built in bed calls for modification. He adds that the plan should act as a guide and it is for this reason that it is prepared.If properly followed while act to adjust certain elements to fit the situation, it sho uld be easy to solve the crisis than when there is no plan at all. The challenge of coming up with an effective plan is also cited as a problem given that response and recovery is largely influenced by the kind of crisis and risk management plan that the company has in place. To curb this problem, Smith (2001 64-65), Fink (1986 36-39), Gottschalk (200296) and Mitroff (2001 29-35) give the following key elements that are desired for a risk and crisis management plan to be effective.Provision for continuous identification, evaluation and management of risk should be put in place. This is because the company is bound to face new challenges everyday and in the wake of globalisation, new economic and social risks and challenges keep cropping up (Mitroff, 2001 33). ? Constant review of the effectiveness of the plan is necessary to ensure that all the desired aspects are addressed. Analysing the system of internal control which is part of the risk and crisis control annually can help the c ompany to identify whether the plan is working as desired. For all crisis and risk management plans, the systems actual should rhyme with the organisational culture so that collisions do not occur. ? The crisis and risk management plan must be flexible and one that can effectively respond to evolving risks. A superb crisis and risk management plan offers flexibility such that change in policy and new company strategy may be implemented in order to deal with the crisis at hand (Smith, 2001 65). ? The plan should set proper reportage procedures to be followed in the event of occurrence of an incident.On top of that, a procedure for reporting failures in the plan should be well laid out. ? The crisis and risk management plan should provide for training to all members of staff so that they are aware of the roles to take in the event of a disaster, the reporting procedures and any other relevant information contained in the plan. Research Design and Method Introduction This portion of the study establishes the ability of the company to satisfy the set objectives. It shows the design of procedures used in the study and outlines the major limitations affect during the study.Research scope The previously set objectives aim at establishing whether there was a crisis and risk management plan at Northern Rock and what could have been done better to further contain the crisis. The study is therefore limited to Northern Rock and to crisis and risk management as a management strategy. The fluidness crisis at Northern Rock forms the basis of the study. Data and data collection The data collection cover was applied in such a way that its efficiency could be gauged by the results obtained from the study.In doing so, uncreated and secondary data were employed in the entire study process. a) Primary data This formed an strategic part of the research as it helped in obtaining factual information from direct respondents. The use of written questionnaires and unwritten inte rviews to obtain information from the respondents was used. The data obtained was assimilated during the analysis of the study. Respondents were notified prior to their interviews so as to ensure that the information was more accurate. b) Secondary data The use of secondary data was invaluable in the study.This is in recognition that any research must incorporate other peoples work as a precedent to the study. The use of journals, books, articles and other scholarly works were highly used to obtain the theory surrounding the study. The literature review practically involved the reviewing other peoples work so that secondary data was of great importance. Sample selection, technique, and size The study sample incorporated a few present and former company officials as well as economic analysts who studied the Northern Rock liquidity crisis.Strategic sampling system was used to identify the officials and individuals to be interviewed during the period of study. A total of twenty five r espondents were sent questionnaires and eight agreed to perform an oral interview. Eighteen questionnaires were returned and observations and responses were assimilated for the purpose of the study. Ethics of the research methodological analysis At the beginning of the study, the research set an objective of reducing respondents compromise as far as possible. In order to satisfy this, respondents were not required to mention specific names within the company.For privacy purposes, respondents names were not required in the questionnaires. This served to raise the confidentiality levels as a factor in conducting scholarly research. Limitations of the study Even though this methodology played a vital role in satisfying the set objectives, various limitations faced the researcher. Without these limitations, more information would have been obtained to further improve the study. Among the major constraints was the high level of expenses. These included questionnaire printing and governm ent note costs as well as travelling costs to meet the respondents.The problem of incomplete questionnaires was general mostly due to the highly complex human nature so that some of the staff members could have been worried about giving information they considered confidential due to fears of victimization. This could have contributed to errors in the information obtained. The time element was also limiting which did not enable maximum amount of data as would have been desired. Analysis and Findings Most of the respondents in the study ascertained that Northern Rock was lucky and were it not for the government bailout the bank would have landed into bankruptcy.Unavailability of credit which was actually the banks major source of finance was an unsoundable blow to the bank whose reputation had made it the fastest growing mortgage lender in the UK. The situation was made worse by the bank run which was in essence caused by the media portrayal of the crisis (Victoria, 2008 117-119). Nelkin (1998 347-348) notes that the media could highly influence how a crisis affects the company due to messages and speculations made. As soon as the bank sought help from the Bank of England, word went round through the media and the public went into panic following the collapse of the bank.The result was enormous amounts of withdrawals which highly overwhelmed the banks finances (Shin, 2008 6). Northern Rock therefore sunk into losses and could barely afford to sustain the payment of loans. Analysts involved in the study suggested that the bank run could have been avoided had the banks management taken Northern Rocks crisis management plan In an effort to keep focus on the research scope, only the ingredient of the crisis and risk management plan associated with the liquidity crisis was analysed.For each point noted, a note on how the situation could have been handled better is provided. Northern Rock management had given a thought to the possibility of lessening of market a t home and shortage of funds from local banks. To help reduce this possibility, the bank had diversify its operations to other countries like Canada, United States, Europe, Australia and Far East (Tevin, 2008 21-22). This was considered to be a substantial backup for any eventualities in the domestic market. The company had also secured its liquidity through insurance to cover for any shortages.In their plan however, they had not judge a crisis that would cause the collapse of their major sources of funds at the same time. It would have been unimaginable that the source of finance that seemed so reliable would collapse leaving the bank destitute. Even Dr Ridley the banks chairman had noted that the bank had not though at one time that its sources of finance could collapse at the same time (Llewellyn, 2008 49). This just goes on to show that crises are not intimately predictable and that routine can be deceiving.The fact that Northern Rocks long-term sources of finances were ever lastingly available to them due to the high amount of mortgage securities almost ruled out the possibility of running out of finances. The Northern Rock crisis management can be said to have been inadequate. The reasoning behind this is that should it have been adequate, the liquidity crisis may have been avoided or subsidised. As noted by Regester et al (2005 196-198), a good plan must entail the guidelines to be followed in the event of a crisis. Further, Northern Rocks management failed to predict which is one of the objectives of the banks risk management plan.Varma (2008 1) notes that banks should be able to use cash flow projections to anticipate future fluctuations in demand for their customers. Using these projections, they can easily determine whether a liquidity problem is likely to arise due to increased demand or whether inventory will pile up as a result of reduced demand. It is also possible to gauge from the rise in interest rates offered by banks and other security t raders. Such information could have proved vital to the management and this could have been used to limit mortgage lending and hence reduce the impact of the crisis.As noted by Tevin (2008 17), the bank did not even have adequate liquidity insurance, a lesson which the England Governor noted could have been learnt from Countrywide, a US bank that suffered the same crisis that Northern Rock was facing. Insurance cover serves in ensuring that the companys assets are protected. This ensures that whenever assets that the company has insured against are disjointed in the event of a crisis, compensation can protect it from committing more resources in replacing the asset (Alderman, 2008 204).With such knowledge the bank could have obtained enough liquidity insurance as security for the future. They could also have provided for plans to cope with a credit crisis should they get into the same position with Countrywide. This way, it could have been ready and encountered the crisis more bold ly without having to seek government bailout. Northern Rock over-relied on one source of finance so that when it collapsed the effect was quite staggering. The theory of crisis management warns against relying on one source of supply because its failure could have detrimental effects on the company (Coombs, 1999 114-115).Northern Rock had been relying heavily on loans gained from mortgage securities to finance their clients mortgage needs and when they could not afford to meet the demand following the reduced liquidity levels, they had nowhere to turn to (Congdon, 2009 11). Banks which were willing to lend proved too big-ticket(prenominal) for the bank to afford and still continue to operate comfortably. The whole problem arose because once these sources of finance collapsed there was no other source of finance leading to the liquidity crisis.It is a major observation that companies rarely think about the possibility of a time when a certain source of supply will not be available to them because as long as they are concerned they have always relied on the source (Wiley, 2006 85). Northern Rock should have diversified more as a way to maintain the flow of funds. For example, they could have used more deposits instead of relying on loans only. Tevin (2008 14) notes that only 23 percent of their liquidity was in the form of deposits which Victoria (2008 119) notes to be the major sources of bank liabilities.By focusing on loans, they lost their major source of money supply when the credit crunch set in. The management did not act swiftly to respond to rumours about liquidity shortages. According to Tevin (2008 24) the bank had received warning signs about a possible shortage in credit as a result of the ongoing economic crisis. The Financial Stability Report that the Bank of England released in April 2008 suggested that wholesale funding which was on the rise in the market could pose unforeseeable danger to liquidity (Llewellyn, 2008 51).Analysts had also predi cted the same. Instead of analysing the possible risk and taking measures, Northern Rock continued with the expansionary lending policy (Tevin, 2008 24). Mortgages continued to be issued yet there was a possibility of being unable to sustain the demand following the credit shortage. If the management had acted wisely, it could have limited the mortgage lending so as to save the finances available until a favourable time came. Its ability to detect the possibility of such an occurrence was limited hence the reason why the company was caught unawares.The crisis and risk management plan was not also well utilized when the bank realized its plight. Referring to the liquidity crisis, Northern Rock CEO maintained that the prediction made by the bank about its source of finances had been wrong in assuming that the mortgage assets would maintain the banks liquidity. The company has made an attempt to recover from the crisis using the government assistance issued and change in strategy. This is part of a crisis management plan which requires that a company take the necessary measures to correct a crisis.As noted by Smith (2000, 65), Northern Rock had to change strategy so as to better manage the crisis. Their Together loans for example were withdrawn. These loans were an inducement to first time buyers and involved combining a secured and unsecured loan to obtain finance (Tevin, 2008 26). The bank however could not manage to offer these loans given their financial constraints and had to withdraw them. The bank is still retrieve and depositors have started gaining trust in the bank again more so because the government ownership provides a substantial level of financial security.Conclusions and Recommendations After an analysis of the case of Northern Rock and the importance of crisis and risk management, it would be true to say that the companys crisis and risk management plan was not properly implemented during the liquidity crisis. The plan was also inadequate to ad dress the seriousness of the problem given that the company had never anticipated a risk of such magnitude. It is also true that every company needs to have a crisis and risk management plan to help in coping with disasters and incidents if they occur.It can therefore be think that having a crisis and risk management plan cannot be useful if it is not well implemented. This is as in the case of Northern Rock which did not react to the warning signs of the impending danger of a liquidity crisis through finding alternative sources of funds or through reducing its lending capacity. Northern Rock suffered a great deal from the liquidity crisis due to poor implementation of crisis and risk management. The plan was also inadequate and insurance cover taken could not compensate for the loss incurred.What matters however is not what has been lost in the past but what can be saved in future. As Lagadec 1997 28 Shrivatsava (1988 284) suggest, a crisis should act as a learning opportunity for a company to make changes and improvements. The bank needs to focus on building more solid and workable plans to contain such crises as they could happen again in the future. The plan should be made by incorporating all the various aspects of a good crisis and risk plan indicated in this study.This means that the plan to be implemented should focus on constant examination of possible risks and designing of proper measures to counter them. There should also be plans set to address crises in the event that they arise as well as plans to recover after a crisis. This does not mean that the bank should exhaust all its resources on liquidity problems alone. There are other crises and risks which could also face the company and there is need to incorporate them in their crisis and risk management plan as well.The Northern Rock saga is a vital lesson that every growing company must learn from. While risks and crises could be few and far between, the need to account for them in the company strategy is invaluable. This is because there is no way of predicting the future. This should avoid a situation in which the company has to close down because they do not have any finances to cater for the losses incurred during the crisis. Every company should maintain a crisis and risk management plan that helps to shield it from any eventualities that may occur in the course of its operations.There are several lessons that have been learnt from the Northern Rock case study and which other companies can benefit from through the following recommendations. Firstly, disaster may strike at any time hence the need to come up with a plan to deal with risks and crises. It is also notable that some disasters can be predicted so that precautionary measures taken to reduce the shock on the company. To enhance this, constant review of the risks that the company is unvaccinated to should be done.Secondly, reliance on a single supply could pose danger to the company hence the need to diversif y operations or plan for alternatives in case the current sources fail. Finally, having no plan could lead to desperate actions on the side of the company. If the company is not lucky, it could end up closing down. In the case of Northern Rock, there were attempts to sell it and then the government bailout. The bailout means that the company is now under government control and no longer in private hands which could highly impact on the company decision processes and operations.