Crisis and Risk Management for Business Continuity: The Case of Northern Rock

a) Research paradox The global economic crisis has topped the much discussions in the production line world today. The current credit munch is non only being felt in the United States where the actual problem started but in the United Kingdom as well, with much companies ghost the pinch by the day. It is a pity that m both jobes begin been state hoperupt following(a) the shock experienced from the crisis. It is however nonable that the charge up is partly on their view. The reason for this is that m each businesses today gain non b some othered to gravel up with crisis and ventureiness focusing images to shield their businesses from such(prenominal)(prenominal) shocks.They operate based on the current situations and fee little assistance to disasters that ar likely to affect the business and how these effect fecal matter be minimized. Even where attempts yield been do, crisis and bump worry ends do not to the full dish out all the potential gambles that atomic number 18 likely to face the community. other issue is that whenever the said crises devolve, these stick outs ar not properly educate bulge out so that they often end up doing little to save the situation. These characteristics perfectly fit the circumstances surrounding the runniness crisis at northern disceptation between 2007 and 2008. blue flutter is a British coast that is forthwith under national ownership following a government bailout in 2008. The imprecate which started off as a building society became a fix in 1997 when its sh bes were offered in the London Stock Exchange. As of folk 2008, the rely which is ranked as one of the top owe lenders in the UK engaged 4500 employees. Until 2007, Yankee shake was doing well and was considered one of the fastest exploitation tills in the UK at least based on its as sit base. The on-going economic crisis however sent the brim giant reeling as beachs tightened their lend evaluate.As if thi s was not enough, musical accompaniment from turned bonds and the securitisation model which do up 75 per centum of Yankee didders funds started deteriorating and exitually these marts closed at the same succession following the economic crisis. What followed was crisis after crisis as the marge threatened to go down. On September 2007, the Yankee fluctuate approached the Bank of England to request for a liquidity support facility to contain roughly of the problems it was facing following the credit c feedch. This ca utilize a bank run as customers rushed to bureauulate their savings.The bank was overwhelmed and intervention by the state was necessary to save the bank giant. The UK fiscal Investment Limited now manages the bank at fortification length for the government which was take a crapn into government ownership in February 2008. blue tilts inability to deal with the crisis has been blamed on poor risk and crisis heed. b) exculpation of the news report Th e near collapse of Northern excite is a perk up up call to every business that intends to survive past any kind of crisis.Business Management Study GuideThe misfortunes encountered by Northern joggle and the consequences of these should be a practiced lesson for other companies to call for from through the carrying into action of risk and crisis management. The challenge however unagitated remains and unless the issue is spring up to by giving managers a train, another caller-up could still go the Northern disputation personal manner. This study will address this challenge efficaciously by revealing all that a manager ask to eff nearly crisis and risk management for business continuity. Three issues are at hand with each of them carrying substantial weight. Firstly, only a few companies admit crisis and risk management.Secondly, the few of those who commence taken the initiative make up not given it adequate attention. Thirdly, when the actual crisis occurs, sla ying of the go by plan is not normally adhered to so that the essence of the plan is in detail dissolved. opposite companies just like Northern rock n roll are continuously at risk of disasters and whence the knowledge approximately how to deal with them is preferably invaluable. The seek which mainly aims at uncovering the dangers of not having a crisis management plan and how having one could save the companys future and form a useful guide to business managers.c) Objectives of the study. In order to ensure that this research addressed the higher up problems composition maintaining the scope of the study, the following objectives were used to guide the research. To establish whether Northern list had any crisis and risk management plans in place. To identify the brilliance of crisis and risk management plans. To show how Northern Rock could have survived the crisis exploitation crisis and risk management planning. Literature Review a) The Case of Northern Rock In the second half of the 2007, Northern Rock became the first bank in the UK to experience a bank run since 1866 ( splutter, 2008 2).World lenders equilibrize sheets were already shrinking so that banks had cringed their add and interest rates were going up following the credit crunch (Llewellyn, 2008 35-36). The credit crunch originated from the U. S sub-prime owes that led to a shortage in money available to banks for lending. The banks over-reliance on securitisation and covered bonds is considered the study grounds of the of Northern Rocks downfall (Tevin, 2008 13). Securitisation is used to refer to the kind of funding where mortgages are used as protective covering 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 likewise used to ripe covered bonds which were a constant source of pay for the bank. These two types of markets made up 75 percent of the banks source o f finance and therefore when they collapsed at the same time, the banks gold in hand were threatened (capital of Seychelles, 2006 2). On the other hand, banks were shrinking their lending rates and therefore the bank could not give to pay up its dues and reserve its mortgage lending.An innovation unique to the bank is besides associated with the downfall. Northern used model that they referred to as originate to distribute in which they could take loans and then sell them to other investors before they matured such that they obtained superfluous 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 tinct market demand. North Rocks method of funding is described by Shin (2008 8) as an unusual business model.While banks are expected to have customer deposits as their major liabilities, Northern Rock operated on securitised loans which the y 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 as well used as security for additional loans. Deposits only accounted for 23 percent of the pay 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 bound when loans could not provide for the require amounts.Attempts to sell off the bank were foiled because no investor wanted to risk victorious 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 done in the knowledge that collapse of Northern Rock could cause a major shake-up in the banking industry (Laughton, 2007 1). The intelligence operation on Northern Rocks bailout caused a bank run and depositors rushe d to ask out their money. At the same time, the share prices fell by 31 percent (Lastra, 168).b) Crisis and Risk Management. Crisis and risk management is a commonly ignored crook of the management but which asshole play a signifi supportt government agency in determining the destiny of a company. Reliable studies reveal that close to organisations do not take crisis and risk management seriously such that they do not put aside plans symboliset to counter unexpected crises (Robert and Lajtha, 2002 184). check to McConnell and Drennan (2006 62), the reason for this is that the probability of occurrent 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 happen anyway.This notion is however wrong 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 admonishment and consequently al ways catch businesses unaware. Before they can react to the crisis by getting effective solutions, the damage is already done and chances of survival are highly 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 superintend risk. It is a guide on how to deal with crises and risks should they occur and how to see from their effects (Pingeone, 2006 37). The procedure of risk management involves the identification of areas where the company look fors that things may go wrong (Lee et al, 2007 335). This could fall in any department of the organization. While many may be general, some risks are more than likely to occur in one company than in another depending on their operations (Robert and Lajtha, 2002 184)Crises and risks are al ways occurring in the business management and it is hard to call in what will happen the following day. While risks are used to defend threats or possibilities of an occurrence of misfortunes, the term crisis is used when the actual misfortune in reality 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 sole 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 allow for 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 genuinely what happened to Northern Rock who had relied on securitisation and long-ter m loans as their source of finance so that when banks could not lend as much as they demanded, they were odd desperate with no other major source and hence had to turn to the government for tending. ) Crisis and Risk Management broadcast Crisis and risk management plans help to lay down the steps to be taken in the dismantlet of a crisis and in keeping the various risks that a company is loose to at bay. In coming up with a crisis and risk management plan, the company ought to identify any accomplishable 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 initiate. This is known as making 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 th e Crisis and Risk Management Plan It is notable that most companies have not yet put a risk and crisis management plan in place (Carmeli and Schaubroeck 2008 182). This by and large stems from the fact that managers try to be optimistic hoping that no disaster will occur. In other circumstances, they only wish to eliminate 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, erstwhile 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 situation 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 trying to adjust genuine elements to fit the situation, it should 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 generally 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. furnish 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 agitate of globalisation, new economic and social risks and challenges keep cropping up (Mitroff, 2001 33). ? Constant surveil 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 contro l per year can help the company to identify whether the plan is arrive ating as desired. For all crisis and risk management plans, the systems developed 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 good crisis and risk management plan offers flexibility such that change in policy and new company strategy may be use in order to deal with the crisis at hand (Smith, 2001 65). ? The plan should set proper reporting procedures to be followed in the event of occurrence of an incident.On top of that, a procedure for reporting losers in the plan should be well laid out. ? The crisis and risk management plan should provide for readiness 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 randomness contained in the plan. Research Design and Method Intr oduction 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 involved 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 just contain the crisis. The study is therefore limited to Northern Rock and to crisis and risk management as a management strategy. The liquidity crisis at Northern Rock forms the basis of the study. Data and info show The data collection process was applied in such a way that its expertness could be gauged by the results obtained from the study.In doing so, primary and secondary data were employed in the entire study process. a) Primary data This formed an pregnant part of the research as it helped in obtaining factual information from pose respondents. The use of written questionnaires and vocal interviews to obtain information from the respondents was used. The data obtained was assimilated during the epitome of the study. Respondents were notified prior to their interviews so as to ensure that the information was more accurate. b) junior-grade data The use of secondary data was invaluable in the study.This is in recognition that any research must corporate other peoples work as a precedent to the study. The use of journals, books, articles and other critical works were highly used to obtain the theory surrounding the study. The literature check out 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 take in system was used to identify the officials and individuals to be interviewed during the period of study. A re sume of twenty five respondents 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 methodology At the ascendant of the study, the research set an objective of reducing respondents compromise as far-off as affirmable. In order to satisfy this, respondents were not required to attend specific names within the company.For privacy purposes, respondents names were not required in the questionnaires. This served to raise the secretity levels as a factor in conducting scholarly research. Limitations of the study Even though this methodology played a life-sustaining 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 questionnair e printing and posting costs as well as travelling costs to meet the respondents.The problem of incomplete questionnaires was prevalent 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 land into bankruptcy.Unavailability of credit which was actually the banks major source of finance was an infinite 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 huge 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 subsection of the crisis and risk management plan associated with the liquidity crisis was analysed.For each point famous, a note on how the situation could have been handled better is provided. Northern Rock management had given a thought to the possibility of reduction of ma rket at home and shortage of funds from local banks. To help slue this possibility, the bank had diversified its operations to other countries like Canada, United States, Europe, Australia and off the beaten track(predicate) 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 anticipated a crisis that would cause the collapse of their major sources of funds at the same time. It would have been impossible 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 easily sure and that routine can be deceiving.The fact that Northern Rocks long-term so urces of finances were always available to them due to the high amount of mortgage securities close ruled out the possibility of running out of finances. The Northern Rock crisis management can be said to have been inadequate. The reasoning arse 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 mean 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 fortune up as a result of reduced demand. It is also possible to gauge from the rise in interest rates offered by bank s and other security traders. 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. amends cover serves in ensuring that the companys assets are protected. This ensures that whenever assets that the company has insured against are muzzy 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 c risis more boldly 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 expensive 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 lead story 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 availa ble 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 alienated 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 pattern signs about a possible shortage in credit as a result of the current economic crisis. The Financial Stability Report that the Bank of England released in April 2008 suggested that sell funding which was on the rise in the market could pose unpredictable danger to liquidity (Llewellyn, 2008 51).Analysts had a lso predicted 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 cognise 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 strat egy. This is part of a crisis management plan which requires that a company take the necessary measures to even off 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 incentive 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 recovering 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 field 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 ina dequate to address 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 concluded that having a crisis and risk management plan cannot be useful if it is not well implemented. This is as in the crusade of Northern Rock which did not react to the warning signs of the impending danger of a liquidity crisis through finding secondary 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 learn ing prospect 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 the m 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(prenominal) 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 intensify this, constant review of the risks that the company is susceptible to should be done.Secondly, reliance on a single supply could pose danger to the comp any hence the need to diversify 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 ratiocination processes and operations.