Emergency funding for Northern Rock approved

The Bank of England said it had approved emergency funding to help British mortgage lender Northern Rock PLC overcome a liquidity crisis.

The company issued a profit warning saying that market turmoil sparked by the U.S. subprime lending crisis meant its profits would fall to between 500 and 540 million pounds (US$1 billion and US$1.1 billion; EUR730 million and EUR788 million) - as much as 147 million pounds (US$298 million; EUR214 million) lower than expected.

Northern Rock shares plunged 25 percent to 476.75 pence (EUR6.91; US$9.60) on the London Stock Exchange as the revelation of the bank's cash crisis spooked investors.

Northern Rock chief executive Adam Applegarth said the company expected to borrow substantial amounts of money from the Bank of England at a penalty rate, but did not specify how much.

The national bank's intervention is the first of its kind since it assumed the role of "lender of last resort" a decade ago when it gained independence from the British government.

The bank, which relies heavily on the wholesale money markets for cash, has been unable to raise money since the money markets choked up earlier this summer. Applegarth said the liquidity problem was likely to continue for the rest of the year.

He added that though emergency funds were requested, Northern Rock had billions of pounds in cash at its disposal.

"We can't tell when the global (credit) freeze is going to unwind. On that basis it made sense to get this facility now," Applegarth told Sky News.

Despite the move, experts said there was little risk of the bank, which holds 113 billion pounds (US$ 226 billion; EUR165 billion) in assets, going out of business or other lenders being suffering too badly as a result.

However shares in other British banks fell Friday, with those in Alliance & Leicester PLC and Bradford & Bingley down by between 6 percent and 7 percent. HBOS PLC and Barclays PLC fell by around 3.5 percent.

The bail out is the first time the Bank of England has issued its emergency credit facility in the ten year's since its independence, but there was no doubt over Northern Rock's solvency, Treasury chief Alistair Darling and Britain's Financial Service Authority said Friday.

Darling said the Bank of England had approved the funds in the interest of keeping the British banking system stable and told customers there was no reason to panic

"All this stems from the problems in the American housing market," British Treasury Secretary Alistair Darling told Sky News. "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."

Some of the banks customers paid little attention to the call for calm and lines formed outside some of its branches across the country.

Uncertainty over exposure to the U.S. subprime mortgage markets has seen a massive increase in the interbank lending rates, a facility that is the cornerstone of Northern Rock's business model.

In Britain, the key three-month interbank lending rate, or LIBOR, now sits at 6.82 percent - more than a full percentage point above the 5.75 percent base rate and just above the Bank of England's emergency lending rate of 6.75 percent.

"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," said Angela Knight, chief executive of the British Bankers' Association.

"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," she told British Broadcasting Corp. radio.

Bankers warned against making parallels between the liquidity crisis affecting Northern Rock and the troubled Countrywide Financial Corp. in the United States - which has announced it is to cut 13,000 jobs and has been forced to borrow billions of dollars as it struggles to weather the slowdown in the U.S. housing market.

The British bank is more diligent in its lending policy, no longer has a subprime book and has a repossession rate of less than one percent, said Eric Leenders an executive director of the British Bankers Association.

"It's a very healthy business which has run into a simple liquidity issue owing to the market jitters around the U.S. subprime mortgage market," Leenders said.

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Author`s name Angela Antonova