BANKS WATCH FOR NORTHERN FALLOUT

Concerns over emergency funding for the Northern Rock bank could pull fellow banks on the UK markets into negative waters, analysts have said.
An emergency lending facility to Northern was agreed by the Chancellor, Alistair Darling, on advice from Mervyn King, governor of the Bank of England.

Northern Rock, one of the UK's largest mortgage lenders, has also issued a warning on profits.

It does not mean the bank is going bust says BBC Business Editor Robert Peston.

It is much more exposed than its rivals to this distaste for mortgage debt

Robert Peston
BBC Business Editor


Robert Peston's blog
Q&A: Northern Rock
Reaction to the news

Further soothing noises have been made by experts to say that the move does not mean Northern Rock's business is in trouble.

Even if its shares fall, customers' mortgages and savings with the firm should not be affected.

However, the market is watching to see how its shares perform on Friday, as well as those of peers such as Bradford & Bingley and Royal Bank of Scotland.

The disclosure is expected to rock financial markets, Mr Peston said.

'Lender of last resort'

Northern has struggled to raise money to finance its lending ever since money markets seized up over the summer, in the wake of the US sub-prime loans crisis.

The decision for the Bank of England to become the "lender of last resort" is extremely rare - and also comes after consultation with the Financial Services Authority.

NORTHERN ROCK FACTS
Founded in 1965 after merger of Northern Counties Permanent Building Society and Rock Building Society
Became a public company in 1997
Has 18.9% of UK lending
Loans and assets of £113bn
Deposits from customers of £24bn


Northern Rock's share price

According to our business editor, the chancellor, Bank and FSA will make clear that the emergency facility enjoyed by Northern Rock will be made available to any other bank that runs into similar liquidity problems - as against more fundamental solvence issues.

It is a major attempt to restore confidence to the market. The chancellor also made the Northern Rock decision after discussions with Callum McCarthy, who chairs the FSA.

It is an unlimited facility, with interest rated at a "penal rate" of more than 1% above Bank base rate.

On the assumption that the current conditions remain until the end of 2007, there will clearly be an impact on Northern Rock's 2007 asset growth and, therefore, on profits

Northern Rock statement

The collateral against the loan will be mortgages made by Northern Rock, which are regarded by the Bank of England as sound.

In a statement, Northern Rock said it had "agreed with the Bank of England that it can raise such amounts of liquidity as may be necessary by either borrowing on a secured basis from the Bank of England or entering into repurchase facilities with the Bank of England".

It added: "Such repurchase facilities would include securities that have prime residential mortgage assets as underlying collateral.

"On the assumption that the current conditions remain until the end of 2007, there will clearly be an impact on Northern Rock's 2007 asset growth and, therefore, on profits."

'Good quality loan book'

The statement added: "There will also be a consequential impact on its 2008 profits, which will be driven by developments in global liquidity conditions and the interest rate and credit risk environment, as well as the prospects for the UK mortgage market."

The bank also said that it was considered by the FSA to be "solvent".

An FSA statement said Northern Rock "exceeds its regulatory capital requirement and has a good quality loan book".

"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."

SOURCE: BBC