For the Northern Rock case study, what was the low-probability-high-impact event that was most responsible for the loss event?

Step 1: Understanding the Northern Rock Case Study

Northern Rock was a UK bank that collapsed in 2007 due to its heavy reliance on short-term

wholesale funding rather than customer deposits.

When the 2007 financial crisis hit, the inter-bank lending market and commercial paper market froze,

cutting off Northern Rock’s access to liquidity.

Step 2: Why Option C Is Correct

Northern Rock depended on short-term borrowing to fund long-term mortgage lending.

When the liquidity crisis hit, it couldn’t refinance its debt, leading to a bank run and collapse.

The Bank of England had to intervene, and the UK government nationalized Northern Rock in 2008.

Step 3: Why the Other Options Are Incorrect

Option A ("Acquisition of Merrill Lynch") → Incorrect because this happened in 2008, after Northern

Rock’s failure.

Option B ("Withdrawal of Deposit Protection") → Incorrect because UK deposit protection remained

in place.

Option D ("Real estate exposure in Berlin") → Incorrect because Northern Rock's problem was

funding liquidity, not real estate losses.

PRMIA Risk Reference Used:

PRMIA Liquidity Risk Management Framework – Describes how liquidity shocks impact banks like

Northern Rock.

Basel III Liquidity Coverage Ratio (LCR) Standards – Created after Northern Rock to prevent similar

liquidity crises.

Final Conclusion:

The collapse of the inter-bank and commercial paper markets was the key low-probability-high-

impact event that led to Northern Rock’s failure, making Option C the correct answer.