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This is the largest
bailout of a British lender in 30 years. The
mortgage provider was unable to make new loans due
to rising credit costs. This is
the first time Britain's central bank has acted as "a lender of
last resort" since becoming independent on
interest rate policy in 1997.
Treasury chief Alistair Darling said there was no
threat of insolvency at the bank and urged customers
not to panic.
"There's plenty of money
in the system," he said. "All the banks have money,
but at the moment they're not lending to each other
in the way they usually do." |
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The rescue supports concerns
among investors and depositors that other financial firms
relying on short-term credit rather than deposits may also be
vulnerable. The rate they borrow at exceeds the amount they earn
from lending. The Chancellor of the Exchequer Alistair Darling
authorized the move. He said the Bank of England will step in as
the lender of last resort "where institutions face short-term
liquidity difficulties". |
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The
Bank of England, UK Treasury and Financial Services Authority in
a joint statement said, the assistance will "help
Northern Rock to fund its operations during the current period
of turbulence in financial markets. Northern Rock is solvent,
exceeds its regulatory capital requirement and has a good
quality loan book". |
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The mortgage
lender itself described the agreement with the central bank as a
"standby liquidity arrangement". It added that all its loans are
in the prime market and credit quality remains strong. CEO Adam
Applegarth said, "In these extreme times we are pleased to have
a high-quality asset base and remain confident in the excellence
of our strong customer franchise, our efficient business
platform and our well-known brand". Applegarth added, "Though
substantial funds at a penalty rate were requested by the bank,
Northern Rock had billions of pounds in cash at its disposal. |
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Applegarth told Sky News that. "We
can't tell when the global (credit) freeze is going to unwind.
On that basis, it made sense to get this facility now." He did
not disclose how much the bank had borrowed. |
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The Bank of England eased
restrictions on financial institutions, thus encouraging them to
lend more to each other as it tries to reduce overnight
borrowing costs now threatening to slow economic growth.
Interbank lending rates have risen to the highest level in nine
years as banks scale back lending to each other. This
action by the UK central bank was its first to help credit
markets since the subprime market collapsed. Governor Mervyn
King has indicated the bank won't go as far as the ECB and the
Fed because policy makers can't afford to "encourage excessive
risk taking". |
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Northern Rock was formed from a merger between two
building societies and the initial public offering
of Northern Rock Building Society in October, 1997.
Hundreds of Northern Rock customers crowded into
branches to pull out their savings while queuing
with about 30 people outside the Maddox Street
branch in London's West End. Northern Rock
had been a shining
example within the bank sector for years while
posting 23 years' of record earnings. |
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British Treasury chief Alistair Darling said there
was no threat of insolvency at the bank and urged
customers not to panic. He said, "There's plenty of
money in the system... All the banks have money, but
at the moment they're not lending to each other in
the way they usually do." Uncertainty over exposure
to the US subprime mortgage markets has played out
in the interbank lending rates. That interbank
facility is the cornerstone in Northern Rock's
business model. |
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Financial experts agree
that there is little risk that the Northern Rock --
which holds 113 billion pounds ($226 billion) in
assets -- would collapse. However, that meant little
to investors, who began dumping shares of other
British Banks. Alliance & Leicester PLC and Bradford
& Bingley fell between 6% and 7%. HBOS PLC and
Barclays PLC fell by around 3.5%. |
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statement from the central bank said, "The decision
to provide a liquidity support facility to Northern
Rock reflects the difficulties that is has had in
accessing longer term funding and the mortgage
securitization market, on which Northern Rock is
particularly reliant." In Britain, the key
three-month interbank lending rate, or LIBOR, now
sits at 6.82 percent. That is more than a full
percentage point above the 5.75% base rate and just
above the Bank of England's emergency lending rate
of 6.75%. |
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Angela Knight, chief
executive of the British Bankers' Association told
the British Broadcasting Corp. radio audience, "This
isn't about solvency. This is about a short-term
problem that the Northern Rock has in getting
liquidity. That is, getting some cash from the
normal interbank lending market... "I think
that anybody who is waking up this morning who is
either a saver with Northern Rock or has got a
mortgage... can be absolutely confident that they
have got their money with or they have borrowed from
a very sound financial institution". |
| Bankers
warn against drawing parallels between
Northern Rock and the troubled Countrywide Financial
Corporation in the US. Countrywide eliminating
13,000 employees and has been forced to borrow
billions of dollars as it struggles through the
downturn in the US housing market.
Eric Leenders, an
executive director of the British Bankers
Association
said the British bank is more diligent in its
lending policy, no longer has a subprime book, and
has a repossession rate of less than 1%. He stated,
"It's a very healthy business which has run into a
simple liquidity issue owing to the market jitters
around the US subprime mortgage market". |
