Northern Rock was a UK bank that collapsed in 2007due to its heavy reliance onshort-term wholesale fundingrather than customer deposits.

When the2007 financial crisishit, theinter-bank lending market and commercial paper market froze, cutting off Northern Rock’s access to liquidity.

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

When theliquidity crisis hit, itcouldn’t refinance its debt, leading toa bank run and collapse.

TheBank of England had to intervene, and the UK governmentnationalized Northern Rock in 2008.

Option A ("Acquisition of Merrill Lynch")→ Incorrect becausethis happened in 2008, after Northern Rock’s failure.

Option B ("Withdrawal of Deposit Protection")→ Incorrect becauseUK deposit protection remained in place.

Option D ("Real estate exposure in Berlin")→ Incorrect because Northern Rock'sproblem was funding liquidity, not real estate losses.

Step 1: Understanding the Northern Rock Case StudyStep 2: Why Option C Is CorrectStep 3: Why the Other Options Are Incorrect

PRMIA Liquidity Risk Management Framework– Describes howliquidity shocks impact banks like Northern Rock.

Basel III Liquidity Coverage Ratio (LCR) Standards– Created after Northern Rock toprevent similar liquidity crises.

PRMIA Risk References Used:

Final Conclusion:Thecollapse of the inter-bank and commercial paper marketswas the keylow-probability-high-impact eventthat led to Northern Rock’s failure, makingOption C the correct answer.