Bank of England helps Northern Rock to overcome crisis

The leading British mortgage lender Northern Rock PLC experiences great credit crisis, forcing the Bank of England to provide unprecedented emergency funding to overcome a liquidity shortfall.

Photo: Bank of England helps Northern Rock to overcome crisis

As Northern Rock announced a profit warning it attributed to market turmoil sparked by the U.S. subprime lending crisis, slow moving lines of customers looking to withdraw funds and seek assurance trailed through its doors despite assurances that the business was solvent.

"My confidence has been shattered. I would not put a penny into that company again," said Tony Looch, a 68-year-old Northern Rock customer, who withdrew his savings after standing in line for nearly two hours outside a branch in central London. "There are a lot of older people who must be really scared."

Shares in the bank plunged 30 percent to 446.25 pence (6.51 EUR; US$9.05) on the London Stock Exchange as the revelation of the bank's cash crisis spooked investors.

Northern Rock CEO Adam Applegarth announced that profits would fall to between 500 million and 540 million pounds (US$1 billion and US$1.1 billion; 730 million EUR and 788 million EUR) - as much as 147 million pounds (US$298 million; 214 million EUR) lower than expected.

The bank, which relies heavily on the wholesale money markets for cash, has been unable to raise money since the money markets choked up last month. Applegarth said the liquidity problem was likely to continue for the rest of the year as the uncertainty over bad U.S. loans continues to grip the money markets.

Though substantial emergency funds at a penalty rate were requested by the bank, Northern Rock had billions of pounds in cash at its disposal, Applegarth said.

"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 told Sky News. He did not disclose how much the bank had borrowed.

Despite the move and the anxiety of the bank's customers, experts said there was little risk of the bank, which holds 113 billion pounds (US$ 226 billion; 165 billion EUR) in assets, going out of business or other lenders 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 and 7 percent. HBOS PLC and Barclays PLC fell by around 3.5 percent.

There was no doubt over Northern Rock's solvency, Treasury chief Alistair Darling and Britain's Financial Service Authority said as they worked to alleviate concerns in the banking sector.

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.

Asked whether he expected other U.K. banks to face similar problems, Darling said that the Bank of England "made it clear it stands ready to offer assistance."

"What we're doing is entirely right," Darling told reporters, speaking at a meeting of EU Finance ministers in Porto, Portugal. "Stability in the economy, and in the banking system is the foundation of everything we believe is necessary."

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 will 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 1 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.

The Bank of England's intervention is the first of its kind since it assumed the role of "lender of last resort" when it was made independent from the British government in 1997.