Northern Rock Turns To Bank Of England Help

Northern Rock has turned to the Bank of England as the lender of last resort as inter-bank lending tightens up.

Chancellor of the exchequer Alistair Darling authorised the help to Northern Rock, the first time the Bank of England has stepped in to aid a lender since 1998.

The emergency funding was deemed necessary as its usual source of credit to fund mortgage lending from the money markets has become more costly.

Adam J Applegarth, chief executive of Northern Rock, said: "We are seeing extreme conditions in global liquidity, which have impacted on world markets. As a result, we have taken prudent action to rein back our lending until markets normalise."

He added the help of the liquidity support facility reflected the fact "Northern Rock is solvent, exceeds its regulatory capital requirement and has a good quality loan book", a sentiment backed up by a joint statement by the Treasury, Bank of England and Financial Services Authority.

The statement read: "The decision to provide a liquidity support facility to Northern Rock reflects the difficulties that it has had in accessing longer term funding and the mortgage securitisation market, on which Northern Rock is particularly reliant.

"In its role as lender of last resort, the Bank of England stands ready to make available facilities in comparable circumstances, where institutions face short-term liquidity difficulties."

The agreement allows Northern Rock to raise such amounts of liquidity as may be necessary by either borrowing on a secured basis from the central bank or entering into repurchase facilities.

In a letter to the House of Commons Treasury select committee earlier this week, Bank of England governor Mervyn King explained why he would help out any lender needing support.

"The rationale [behind acting a lender of the last resort] would be that the failure of such a bank would lead to serious economic damage, including to the customers of the bank," he wrote.

"The moral hazard of an increase in risk-taking resulting from the provision of lender of the last resort lending is reduced by making liquidity available only at a penalty rate."

The chancellor of the exchequer has explained that need for emergency help came as banks are "reluctant to lend it to each other at the moment because of the problems in America".

He told BBC Radio 4's Today programme: "In order to create a stable banking system, the Bank of England steps in. It makes facilities available to Northern Rock. Northern Rock can draw on them as and when required but it means Northern Rock can carry on trading.

"It means that people can use their accounts in the usual way, they carry on making their mortgage payments in the usual way and Northern Rock can carry on its business."

Mr Darling added: "What is encouraging is that we have a very strong economy in the UK. The global economy is growing strongly; even in the United States they are confident about the future and against that we have a strong and stable banking system."

Michael Coogan, director general of the Council of Mortgage Lenders, explained that consumers needed to understand that the problem for lenders was "in raising funds, not in lending quality".

He said: "The Bank of England would not have provided the loan to Northern Rock if it had concerns about the quality of the lender's own business.

"Lenders are facing funding pressure at the moment, and what they need is a return to more normal market conditions as quickly as possible."