Northern Rock is bailed out by Bank of England

The Times ^ | 9/14/2007 | Helen Nugent, Sam Coates and Christine Seib

[bruinbirdman]

In a rare move, the Bank of England agreed to throw a bank a lifeline and become the “lender of last resort”, effectively agreeing to the first bailout of a British bank since money markets went into crisis over the summer.

Northern Rock, the UK’s fifth largest mortgage lender, applied to the Bank of England for emergency support last night after struggling to raise money.

Financial experts and MPs urged borrowers and savers with Northern Rock to stay calm, telling customers that they should not be tempted to withdraw their funds or switch lenders.

John McFall, chairman of the Treasury Select Committee, said: “I don’t think customers of Northern Rock should be worried about their current accounts or mortgages.

“The fact that the Bank [of England] is willing to act as lender of last resort should be reassuring, because it means they think the problems are temporary.”

The Governor of the Bank of England, Mervyn King, said in a letter to the Treasury Select Committee on Wednesday that the Bank would be prepared to provide emergency loans to a bank that ran into difficulties, so long as those difficulties were the result of temporary market conditions.

Yesterday the Bank of England held discussions with the Treasury and the Financial Services Authority, the City watchdog, to agree a rescue package for Northern Rock. The Treasury refused to comment, saying the issue was “commercially sensitive”. Last night Northern Rock also declined to comment.

Michael Fallon, the lead Conservative MP on the Treasury Select Committee, called the Bank of England’s move alarming. “This is precisely what the bank started by saying it wouldn’t do,” he said. “The danger is that they have already helped Northern Rock, who else will they bail out now with taxpayers’ money? Yes, this money is a loan, an expensive loan, but the bank should have been the player in this crisis that was absolutely steadfast and they are now retreating under pressure.”

Northern Rock will today tell the stock market that it has obtained a letter of unlimited credit from the Bank of England. It will be forced to pay a penalty rate of interest for the money it borrows.

The bank is also expected to issue a warning that its profits growth has been hit hard by its inability to raise sufficient funding.

Shares in Northern Rock fell almost 5 per cent to 639p yesterday as fears that the bank was having difficulty securitising mortgages that it had sold swept through the market. Its shares have almost halved after a profits warning in June.

There has been widespread volatility on international markets over concerns that banks may have to write off big quantities of bad debt held in US mortgages. Northern Rock is more exposed than its competitors because it has fewer savers than its rivals and therefore has to borrow heavily from other banks to fund its lending.

Vince Cable, Liberal Democrat Treasury spokesman, said: “This is a very serious development indeed and it was entirely predictable since Northern Rock is one of those banks which has been aggressively increasing its market share by offering mortgages at multiples of income well in excess of prudent levels.”

Experts said that Northern Rock was suffering because of its dependency on borrowing from other banks.Ray Boulger, senior technical manager at John Charcol, a mortgage broker, said: “It is unusual. Banks will try to arrange things so they do not go to the lender of last resort.

Northern Rock is the largest financial institution based in the North East of England, according to its website. It was founded in July 1965 as Northern Rock Building Society and converted to a public limited company in 1997.

A £4.4 billion relief fund offered by the Bank of England yesterday was drained by banking giants in less than an hour as they struggle to secure finance. The Bank of England pumped the extra cash into the system in a bid to ease soaring overnight inter-bank borrowing interest rates.

[DB]

I hope this isn’t the beginning of something much bigger...

[nathanbedford]

Here is an ominous article but about which I confess I can make little sense. It is ominous because it appears the mortgage crisis has leached into England not because they invested in American mortgage backed securities but because they have been acting domestically as a subprime lender themselves.

It would not be good if the crisis spread to England on a much deeper level because they were aping our banks.