In a pivotal scene, the hero George Bailey, faces a run on his family bank from worried investors convinced they are about to lose their savings. By making an impassioned speech about community and trust, Bailey persuades most of his panicked customers to believe in the bank and not withdraw their money. At 5pm, with a single dollar left in the safe, he closes the door and saves the day.
Alas, there is no Bailey on hand at Northern Rock. Instead, worried staff were forced to call in the police on Friday, while chief executive Adam Applegarth spent Monday reassuring customers all was well, with the startled look of a man on the edge.
The financial explanation for the plight of Northern Rock is simple. Since going public, the bank has grown by cutting back its operating costs, offering low-interest mortgages to price-sensitive savers, and borrowing heavily from other banks to fund its transformation into the UK's fifth-biggest mortgage lender.
There is no doubt that Northern Rock's initial problems were caused by changing credit markets, which forced it to approach the Bank of England last week. But what is really interesting is why it has fallen from grace so quickly.
It was only last Thursday morning that rumours of problems began to emerge. Within 24 hours, lines were forming and phone lines were jamming. Barely five days later, the bank and its share price were in free fall. An almost total absence of brand equity meant that when they were faced with even the smallest indication of trouble, too many customers attempted to empty their accounts completely.
Northern Rock has no reservoir of brand equity because it is a victim of its own success. Applegarth is proud of transforming his company into 'the most cost-efficient bank in Europe'. But by cutting back on branches and personal service, and encouraging customers to bank online and by phone, he also destroyed brand equity. Northern Rock was no longer Diane the bank clerk at the branch on the high street, it was a flickering cursor on a computer screen or a recorded menu choice at the end of an 0800 line.
While it's true these approaches are far less expensive to operate, they are also far less likely to build trust. When the cursor stopped flicking this week and the phone lines went dead, panic erupted.
Northern Rock is also a victim of its own successful targeting strategy. The bank has been able to grow by tempting customers to re-mortgage through its low-interest loans. This price-sensitive segment is easy to attract, but also easy to lose and reacts badly to crisis. These customers moved their mortgage to Northern Rock not because of emotion, history or relationships, but because it was cheap. Those who had banked there for decades and believed in what it stood for would have been more accepting of the credit squeeze.
The irony for Northern Rock is that, after years of destroying its brand equity, it has achieved its goal - it is trading at a huge discount to its tangible net assets. Unlike brands that add value through the intangible asset of brand equity, Northern Rock's brand is worth significantly less than the sum of its parts. One of the big banks can now acquire it for less than the value of its loan book and infrastructure, and make a significant profit in doing so. The Northern Rock brand name, of course, will be discarded. By now the only brand equity it possesses is likely to be negative.
Applegarth should be pleased. He has created a bank so lean that it will soon no longer exist.
30 SECONDS ON ... NORTHERN ROCK
- Northern Rock Building Society was formed in 1965 following the merger of the Northern Counties Permanent Building Society and Rock Building Society. It became a bank in 1997.
- On 13 September, Northern Rock requested emergency funds from the Bank of England after it encountered problems raising funds on the money markets, following the subprime crisis in the US.
- The next day, customers withdrew about 拢1bn. One couple barricaded a manager in her office after she refused to let them take out 拢1m from their internet account.
- A message from chief executive Adam J Applegarth, posted on the bank's website on 16 September, read: 'Your money is safe with us and if you want some, or all of it back, you are perfectly entitled to it. Whilst you may have to wait a little longer than usual ... you will get it.'
- According to John Kirk of analysts Redburn Partners, Northern Rock has a loans to deposits ratio of 314%; Bradford & Bingley's is 184% and Alliance & Leicester's 165%.