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UK RMBS master trusts: Northern Rock – From hero to zero

Northern Rock’s inability to tap the wholesale funding market is a body blow for the whole sector.

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Future business school lecturers looking to illustrate the importance of diversifying your sources of funding will probably have a well-thumbed case study at their disposal entitled “Northern Rock”. The UK mortgage lender has gone from hero to zero in a matter of weeks thanks to market dynamics over which it has no control. But as more than 40% of its funding comes from RMBS it faced the prospect in early September of being a forced issuer in a market where the relationship between fundamentals and pricing has completely broken down.

The precipitous slump in Northern Rock’s share price (it has fallen more than 45% year to date), together with fevered speculation in the financial press that it was now ripe for takeover by a larger rival such as HSBC, suggest that its wholesale-funded business model is fundamentally flawed. Indeed, this view was sealed on September 14 when news broke that the bank had been forced to approach the Bank of England as lender of Last Resort because it had been unable to tap the wholesale funding market at all.

For years, UK lenders Northern Rock and Kensington Mortgages were seen as shining examples of how a monoline mortgage business model funded in the wholesale capital markets could be successful.

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