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10 years on from Northern Rock

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Have the lessons been learnt?
September 2007. Just three months on from the release of the first iPhone queues were forming along UK high streets, but this time for a very different reason. Northern Rock was to become the first UK bank to have a run on it in 150 years. The bank had aggressively expanded in the decade previously, to become the UK's fourth largest lender and enter the FTSE 100. But the growth in lending had been fuelled by borrowing on international money markets to lend to, predominantly, UK homeowners. When the sub-prime crisis hit in the US lending to any borrower with a perceived over-exposure to the housing market dried up, and when the news broke that Northern Rock had sought support from the Bank of England to maintain liquidity, there were queues outside branches the following morning.

The UK commercial real estate market was not directly linked to the sub-prime market in the US, but as the localised crisis spread to global financial turmoil, the two became intertwined with one common cause – unsustainable leverage. Similar to the residential market in the UK, loan-to-value (LTV) levels and the assumptions behind income provisions for commercial real estate did not leave sufficient room to absorb either a correction in pricing, drop in rental values or a reduction in income levels. So when the financial crisis triggered all three at the same time, large volumes of the commercial real estate market fell into negative equity, triggering a fire sale at a time when no-one was buying and further inflaming the situation. The result was the sharpest correction in UK commercial property pricing ever recorded. European markets such as Dublin and Madrid, where over leverage was even more accentuated and focused towards development, saw peak- to - trough corrections of 75% and 58% respectively.

Source : UBS AG

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