Northern Rock rescued by BoE

by Gill Montia

Story link: Northern Rock rescued by BoE

Northern Rock, the UK’s fifth largest mortgage lender, has received emergency funding from the Bank of England.

Unlike most other banks, Northern Rock raises the majority of the money it uses for mortgage lending in the wholesale credit markets.

In the main, other UK mortgage lenders use money in their deposit accounts for their mortgage businesses.

The recent turmoil on the money markets, caused by the US sub-prime mortgage crisis, has made it difficult for Northern Rock to raise funds for a number of weeks.

However, analysts do not believe that the bank will collapse as a result of the current liquidity crisis and the Financial Services Authority has issued a statement in which it states that Northern Rock “exceeds its regulatory capital requirement and has a good quality loan book”.

The lender has assets of £113 billion and now also has the facility to draw on reserves from the Bank of England. However, Northern Rock profits for 2007 will be adversely affected.

Both the Chancellor of the Exchequer and the chief executive of the British Bankers’ Association have reassured Northern Rock customers that the business is sound financially and will continue trading.

Northern Rock’s difficulties were revealed shortly after the Bank of England announced that it would become the “lender of last resort”.

This means that the Bank of England will provide financing with interest at more than 1% above the base rate.

In the case of Northern Rock, the collateral against the loan will be its mortgages.