This is to be carried out with due diligence in order to ensure good asset quality through standardization and these standards should be up to par.
However, in the case of Northern Rock, mortgages were sold at high levels and with little concern for credit risk as their model consisted of following mortgage sales with securitization, which basically packaged these mortgages into vehicles, chunks of which were then sold off to investors, effectively making a huge profit for the bank and transferring the risks forward (Schiller, 2008). This however was only going to work as long as the credit from the money market was available. With the financial crisis, this kind of borrowing became acute and the payments of a short term nature from the money market came due without extension of new credit. The situation was worsened by downfall in customer confidence in the bank and an abrupt liquidity crisis swept through Northern Rock, leading it to demand a line of credit from the Bank of England and eventually nationalization as the government stepped in to save the institution.
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