UK bank gets emergency support

Friday, September 14, 2007

British bank Northern Rock received emergency loans from the Bank of England yesterday, as it felt the effects of the financial crisis originating in the U.S. subprime mortgage market. Queues formed outside branches as many customers sought to withdraw their savings, and shares fell heavily.

Northern Rock, based in Newcastle, is one of the UK’s largest mortgage lenders, with total assets and loans of £113 billion. Pressure has grown on the bank as other institutions have become less willing to buy mortgage debt, following the American subprime crisis.

The support from the central bank was authorised by the Government and the Financial Services Authority, following assurances that the problems were temporary and the bank remained solvent. Some current mortgages are being used as collateral. The lending is an “unlimited” facility, at an interest rate higher than the base rate. Chancellor of the Exchequer Alistair Darling, speaking on Radio 4’s Today programme, encouraged customers to carry on as normal, stating that “Northern Rock will be able to carry on its business”.

Northern Rock chief executive Adam Applegarth also called for calm, but customers were seen queuing outside branches across the country to withdraw money. It is reported that the company website also crashed under the demand.

Shares in the bank fell 31.5% on Friday, down almost 60% from their highest value this year. Applegarth admitted that profits would be hit, but stated that the bank would adapt to the changes. Shares in other lenders also fell, with Paragon being the most extreme, dropping almost 17%. The FTSE 100 closed down 1.17% (74 points) following a recovery in the afternoon.

The last time the Bank of England acted as “lender of last resort” in this way was in 1973, after the collapse of Cedar Holdings.

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