Northern Rock’s shares have fallen sharply after the lender was forced to obtain emergency funding from the Bank of England. The shares plunged in value by 32 per cent overnight, after the Bank of England became 'lender of last resort', offering Northern Rock unlimited funding. The turbulence currently being experienced in the wholesale markets has hit the lender hard and industry experts have voiced fears that it may end up going bust.
However Northern Rock has stated that they currently remain solvent, although it admitted that its 2007 profits will inevitably take a hit. Northern Rock’s chief executive, Adam J Applegarth, 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. Against that background it is inevitable, albeit disappointing, that our profits will be affected. “We remain focused on prime lending in the UK mortgage market and our credit quality remains robust.
The support of the Bank of England through this facility reflects a recognition that Northern Rock is solvent, exceeds its regulatory capital requirement and has a good quality loan book. “In these extreme times we are pleased to have a high quality asset base and remain confident in the excellence of our strong customer franchise, our efficient business platform and our well-known brand."
Chancellor Alistair Darling, added: ""Northern Rock can draw on [the funding] when it requires, but it means it can carry on trading, people can use their accounts in the normal way, they carry on making their mortgage payments in the usual way, Northern Rock will be able to carry on its business."
The industry has this to say
Bank of England Responding to its decision to step in and provide ‘unlimited’ funding for Northern Rock should the situation require it, the Bank of England released a statement which said:
“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.
“This facility will be available to help Northern Rock to fund its operations during the current period of turbulence in financial markets while Northern Rock works to secure an orderly resolution to its current liquidity problems.”
CML The Council of Mortgage Lenders (CML) remained optimistic, with director general Michael Coogan commenting: "Consumers need to understand that the problem for lenders generally at the moment is in raising funds, not in lending quality.
"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. "All lenders are facing funding pressure at the moment, and what they need is a return to more normal market conditions as quickly as possible. We welcome the Bank's intervention and confirmation that it is keeping a close eye on the situation.
FSA The Financial Services Authority (FSA) has said that: “Northern Rock is solvent, exceeds its regulatory capital requirement and has a good quality loan book.”
BBA The British Bankers' Association (BBA) has advised borrowers not to fear the worst in a statement released on Friday: “Northern Rock is a sound and safe bank and there is absolutely no reason for either mortgage customers or savers to worry.
“All Friday’s announcement from the Bank of England, Treasury and the Financial Services Authority means is that Northern Rock has had to make alternative arrangements to meet its normal everyday short term borrowing requirements.
“The British banking system is carefully regulated and overseen which ensures that all banks operate safely and prudently in the interest of their customers.”
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