Bank Of England To Bail Out British Bank

[roamer]

The mods will probably say not Thailand related but its at least as relevant as the Countrywide thread on news clippings with 12000 views and certainly relevant to any Brits with deposits in the bank. This bank provided 1 in every 5 mortgages issued in the UK in the first 6 months of 2007.

Source Financial Times.

Bank of England to bail out Northern Rock

By Peter Thal Larsen and Neil Hume

Published: September 13 2007 21:31 | Last updated: September 13 2007 22:39

The Bank of England will on Friday bail out Northern Rock by providing emergency funding to the beleaguered mortgage lender which has fallen victim to the liquidity squeeze in the banking sector.

In an unprecedented move, the Bank, working with the Financial Services Authority and the Treasury, will step in to prop up Northern Rock by providing it with a short-term credit line that will allow it to carry on operating. The bail-out, which has been approved by the Chancellor of the Exchequer, is the most dramatic illustration to date of how the British banking sector is being hit by the wave of market turmoil that has paralysed the money markets.

It will lift the uncertainty that has been hanging over Northern Rock’s future for much of the past month because it could not access the wholesale funding upon which it is heavily dependent. The Bank is also expected to reassure thousands of the bank’s customers that their deposits are secure.

Northern Rock is the first institution to be propped up since the Bank in 1998 revised the rules under which it will act as a lender of last resort to banks that have hit financial difficulty. The Bank is on Friday expected to say that a similar facility is available to any other institution facing short-term difficulties.

It is understood that there is no concern about the quality of Northern Rock’s mortgage book, which has no exposure to subprime borrowers, or its capital levels. But the bank, one of the UK’s largest mortgage lenders, has proved particularly vulnerable to the liquidity squeeze because it has a much smaller deposit base than other banks.

Northern Rock approached the Bank at the end of last week to discuss using the facility, people familiar with the situation said. The bank made its decision because it faced pressure to refinance obligations that are due to mature in the next couple of weeks.

Northern Rock executives are on Friday expected to say that it will try to trade through its difficulties with the help of the Bank of England facility.

However, the move is likely to make it hard for Northern Rock to remain independent in the long term. The bail-out is a devastating blow for the bank, which grew from its roots as a building society in the north-east of England to become the most efficient mortgage lender in the UK, winning wide praise for its business model and its ability to take advantage of the innovations in the capital markets.

The bank is on Friday set to issue a trading update setting out the impact of the recent market turmoil on its business. Northern Rock declined to comment.

[Totster]

I'll move to the business section

Totster

[LaoPo]

There's more 'NORTHERN ROCK' news:

Australia, N.Z. Dollars Drop on Report of Northern Rock Funding

Sept. 14 (Bloomberg) -- The Australian and New Zealand dollars dropped after the British Broadcasting Corp. reported a U.K. home lender won emergency funding, reigniting credit concerns and sapping the appeal of riskier investments.

The two currencies are favorites for the carry trade, where investors borrow cheaply in yen to put their money in countries offering higher yields. Northern Rock Plc would receive emergency financial support from the Bank of England, BBC reported on its Web site. A BOE spokesman declined to comment when contacted by Bloomberg News.

``The news about Northern Rock triggered selling and is weighing on carry trade sentiment,'' said Danica Hampton, currency strategist at Bank of New Zealand Ltd. in Wellington. ``We're seeing another bout of risk aversion. It's not over yet.''

The Australian dollar fell to 83.48 U.S. cents at 8:14 a.m. in Sydney from 83.96 in late Asia trading yesterday. It declined to 95.87 yen from 96.43 yen. New Zealand's dollar bought 70.78 U.S. cents, down from 71.42 cents. Against the yen, it was at 81.33 from 82.04.

The Australian and New Zealand dollars are the worst- performing major currencies against the U.S. dollar and yen in the past two months, after rising U.S. subprime mortgage defaults squeezed credit and sparked fears of a global economic slowdown.

In carry trades, investors earn the spread between borrowing cheaply in yen, where the benchmark interest rate is 0.5 percent, and investing in New Zealand, with a record benchmark rate of 8.25 percent or Australia, at 6.5 percent.

Continues here:

http://www.bloomberg.com/apps/news?pid=206...&refer=news

And:

Yen Gains on Report U.K. Home Lender Sought Emergency Funding

Sept. 14 (Bloomberg) -- The yen gained against the dollar, euro and pound after the British Broadcasting Corp. reported U.K. home lender Northern Rock Plc applied for emergency funding from the Bank of England, spurring investors to repay loans in Japan.

Japan's currency also advanced against the Australian and New Zealand dollars, favorites of so-called carry trades, on concern losses stemming from U.S. subprime mortgages are spreading. The yen has strengthened against all 16 most-active currencies the past two months as borrowers have struggled to refinance debt after lending rates surged.

``Northern Rock isn't a small company and it caused another round of risk aversion,'' said Tony Morriss, a currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney. ``The yen gained on this and the pound was slammed.''

Japan's currency was at 114.88 per dollar at 7:17 a.m. in Tokyo from 115.08 late in New York yesterday. The yen advanced to 159.32 per euro from 159.79 and climbed 0.5 percent versus the pound to 231.97.

In carry trades, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the borrowing and lending rate. The risk is that currency moves erase those profits.

http://www.bloomberg.com/apps/news?pid=206...&refer=news

LaoPo

[LaoPo]

Bank of England to bail out Northern Rock

By Peter Thal Larsen and Neil Hume

Published: September 13 2007 21:31 | Last updated: September 13 2007 22:39

The Bank of England will on Friday bail out Northern Rock by providing emergency funding to the beleaguered mortgage lender which has fallen victim to the liquidity squeeze in the banking sector.

The Bank of England is not very consistent since on Thursday 13th they said:

"Governor Mervyn King yesterday indicated the bank [of England) won't go as far as the European Central Bank and the Federal Reserve in helping banks cope with the credit rout because policy makers can't afford to ``encourage excessive risk-taking.''

From:

Bank of England Relaxes Deposit Rules to Spur Lending

Sept. 13 (Bloomberg) -- The Bank of England relaxed restrictions on financial institutions, encouraging them to lend more to each other as it tries to reduce overnight borrowing costs that are threatening to hurt economic growth.

Continues here:

http://www.bloomberg.com/apps/news?pid=206...vE&refer=uk

Oh, well...Banks....but I welcome the step of the Bank of England, although 'down under' they're not too happy about it I suppose.

I think the BoE didn't have much choice or 'Northern Rock' would have gone down under themselves, creating a terrifying scenario in the UK mortgage industry and that's the last thing Britain is waiting for...

LaoPo

[endure]

It ought to be pointed out that Northern Rock is not a bank, it's a Building Society - the UK equivalent of a Savings & Loan organisation in the US.

[LaoPo]

It ought to be pointed out that Northern Rock is not a bank, it's a Building Society - the UK equivalent of a Savings & Loan organisation in the US.

I agree; does 'Financial Institution' sounds better ?

They do: Mortgages - Saving accounts - Loans - Creditcards, according to their website.

I suppose the problems are mainly from their Mortgage industry but I think their web info is no longer up to date

"Northern Rock is currently the 5th largest UK mortgage lender, the largest financial institution based in the North East of England and one of the most cost efficient UK mortgage lenders based on key performance ratios."

http://www.northernrock.co.uk/

LaoPo

[R123]

This posting is highly relevant to us in Thailand as Northern Rock, whether a bank or building society, has an offshore operation and is used by many expats.

Does anyone know of any other major financial institution in similar trouble?

Many thanks.

[Carmine6]

It ought to be pointed out that Northern Rock is not a bank, it's a Building Society - the UK equivalent of a Savings & Loan organisation in the US.

I agree; does 'Financial Institution' sounds better ?

They do: Mortgages - Saving accounts - Loans - Creditcards, according to their website.

I suppose the problems are mainly from their Mortgage industry but I think their web info is no longer up to date

"Northern Rock is currently the 5th largest UK mortgage lender, the largest financial institution based in the North East of England and one of the most cost efficient UK mortgage lenders based on key performance ratios."

http://www.northernrock.co.uk/

LaoPo

Sounds like this was part of that short term paper rollover that was going to be a test for the market. I think it's the reverse version of when companies would add dot com to their name and get a spike in their stock even if they had nothing to do with technology. Paper from any non-bank lender is extra scary these days but that doesn't mean there's anything wrong with them. They might need some longer term help though if the commercial paper market stays stuck.

"... will step in to prop up Northern Rock by providing it with a short-term credit line that will allow it to carry on operating."

"It is understood that there is no concern about the quality of Northern Rock’s mortgage book, which has no exposure to subprime borrowers, or its capital levels. But the bank, one of the UK’s largest mortgage lenders, has proved particularly vulnerable to the liquidity squeeze because it has a much smaller deposit base than other banks."

[lazeeboy]

It ought to be pointed out that Northern Rock is not a bank, it's a Building Society - the UK equivalent of a Savings & Loan organisation in the US.

I agree; does 'Financial Institution' sounds better ?

They do: Mortgages - Saving accounts - Loans - Creditcards, according to their website.

I suppose the problems are mainly from their Mortgage industry but I think their web info is no longer up to date

"Northern Rock is currently the 5th largest UK mortgage lender, the largest financial institution based in the North East of England and one of the most cost efficient UK mortgage lenders based on key performance ratios."

http://www.northernrock.co.uk/

LaoPo

Sounds like this was part of that short term paper rollover that was going to be a test for the market. I think it's the reverse version of when companies would add dot com to their name and get a spike in their stock even if they had nothing to do with technology. Paper from any non-bank lender is extra scary these days but that doesn't mean there's anything wrong with them. They might need some longer term help though if the commercial paper market stays stuck.

"... will step in to prop up Northern Rock by providing it with a short-term credit line that will allow it to carry on operating."

"It is understood that there is no concern about the quality of Northern Rock's mortgage book, which has no exposure to subprime borrowers, or its capital levels. But the bank, one of the UK's largest mortgage lenders, has proved particularly vulnerable to the liquidity squeeze because it has a much smaller deposit base than other banks."

in the early 80s northern rock were the only people to offer me a mortgage ,small soft spot for them

[pkrv]

This is front page stuff on the BBC web site

http://news.bbc.co.uk/

[Carmine6]

The stock is trading down 19% at the open. It was down 4.91% yesterday.

[LaoPo]

This is front page stuff on the BBC web site

http://news.bbc.co.uk/

Northern Rock shares fall by 20%

Shares in one of the UK's largest mortgage lenders, Northern Rock, have fallen by 20% after the Bank of England decided to give it emergency funding.

But experts say it does not mean Northern Rock, which has £113bn in assets, is in danger of going bust.

The bank has struggled to raise money to finance its lending ever since money markets seized up over the summer.

Other bank shares fell, with those in Alliance & Leicester and Bradford & Bingley down by between 5% and 6%.

Meanwhile those in HBOS and Barclays fell by roughly 2.5%.

Northern Rock has also said that its profits for 2007 will be hit, but that it remains solvent.

Speaking on the BBC Radio 4 Today programme, Chancellor Alistair Darling, said: "The problem here is there is a lot of money in the system but they are reluctant to lend it to each other at the moment.*

"In order to create a stable banking system, the Bank steps in and it makes facilities available to the Northern Rock.

* And that is exactly what's creating the -momentum- problems, not only in the UK, but worldwide.

http://news.bbc.co.uk/2/hi/business/6994328.stm

LaoPo

[A_Traveller]

It ought to be pointed out that Northern Rock is not a bank, it's a Building Society - the UK equivalent of a Savings & Loan organisation in the US.

Just to be pedantic here, it is no longer a building society, holding mutual status, but became a plc. By doing so it ceased to be run on the societal basis {all borrowers were in effect shareholders} and became a provider of mortgages and financial services increasing the use of the capital markets to underpin its operations. Ironically this move is what has caused the issues now, since access to capital has been reduced by the lack of confidence in the commercial paper markets. An FSA statement has 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.".

Regards

[chiang mai]

It ought to be pointed out that Northern Rock is not a bank, it's a Building Society - the UK equivalent of a Savings & Loan organisation in the US.

Actually it ought to be pointed out that Northern Rock IS a bank since it's shares were floated on the London Stock Exchange in 1997 as a part of its decision to demutualise.

[andy1308]

Like an earlier poster says, Northern Rock certainly did business at the more risky end of the financial spectrum. Around 12 years ago (when I had next to nothing in terms of a credit history) they were also the only ones to offer me a mortgage, and actually offered 115% of the value of the property. I guess those offers are coming back to haunt them now.

[chiang mai]

This posting is highly relevant to us in Thailand as Northern Rock, whether a bank or building society, has an offshore operation and is used by many expats.

Does anyone know of any other major financial institution in similar trouble?

Many thanks.

I, like many other ex-pats, have been asking myself that question and my strongest suspicion is that the answer is "many of them". I'm currently in the process of selecting which Bank/Building Society to purchase one and two year fixed rate bonds from, a process I go through several times a year. The competition for deposits currently is fierce and this is evidenced by the interest rates that some are offering. For example, Nationwide International as one of the better financial institutions but they are prepared to give me 6.60% whilst many of its peers continue to offer rates that are closer to Base and that tells me they must be hurting.

[lannarebirth]

Question for anyone who may know:

Do British banks offer deposit insurance similar to American banks and American savings and loan institutions? How about for offshore deposit accounts?

[chiang mai]

Question for anyone who may know:

Do British banks offer deposit insurance similar to American banks and American savings and loan institutions? How about for offshore deposit accounts?

Yes, the first £2k is safe but thereafter it's on a percentage basis. The maximum insured amount is I believe £35k.

[lannarebirth]

Question for anyone who may know:

Do British banks offer deposit insurance similar to American banks and American savings and loan institutions? How about for offshore deposit accounts?

Yes, the first £2k is safe but thereafter it's on a percentage basis. The maximum insured amount is I believe £35k.

Thanks for your rapid response. Would that be for each person, or each account?

[A_Traveller]

UK Position:-

• Banks authorised under the Banking Act of 1987 incorporated in the UK including their branches in the European Economic Area;
  
• Certain banks incorporated in other EEA States who have joined the UK scheme to supplement the cover available from the scheme operating in their own home country in respect of deposits taken by their UK offices;
  
• Banks incorporated outside the EEA in respect of deposits taken by their UK offices unless they have been granted permission
  not to participate in the UK scheme (only available where deposits with their UK offices are covered by a home state scheme at least to the same level and scope of the UK scheme).
  

Note Areas such as the Channel islands, IOM etc., are not automatically covered, but may be subject to head office decision. Limits and precise descriptions of the accounts covered need to be reviewed individually. Since '94 the key protection legislation has been under the auspices of the EU.

As they say the devil is in the detail.

Regards

PS Some UK accounts qualify for up to 20,000 GBP {see below the limits have increased, marginally} assuming naturally that the account held that amount or greater.

/edit PPS There are separate schemes in place both in the IoM and CI but both are more limited by coverage.//

Edited September 14, 2007 by A_Traveller

[lannarebirth]

Thank you very much chiang mai and A. Traveller for your responses. Not too unlike American schemes, but considerably lower coverage limits.

[cmsally]

If you lose any savings you have with a bank, a building society or a credit union, the maximum you can expect to get back is £31,700 per person (100% of the first £2,000 and 90% of the next £33,000).

The first £2,000 of an insurance claim or policy is covered in full, plus 90% of the balance. Compulsory insurance (e.g. car insurance) is covered in full.

For investments or mortgages that have gone wrong, the maximum pay-out is £48,000 per person (100% of £30,000 and 90% of the next £20,000).

fool.co.uk

It's per person.

[Journalist]

This is a run taking place on the bank. Their internet banking service has ground to a halt today.

If you have money in Northern Rock, get it out fast.

[chiang mai]

I disapprove of the concept of "get your money out" under these circumstances because it makes no sense. I am also pretty amazed at the way NR's customers are behaving currently by making a run on the bank. The facts are that a) the bank is highly solvent and has assets that exceed its liabilities. the Bank of England has provided lending support to the tune of £4 bill, and c) even on the first day of this so called crisis, two major lenders have offered their services as white nights. Perhaps this is just lemming behaviour on the part of customers and of some posters on TV.

[lannarebirth]

I disapprove of the concept of "get your money out" under these circumstances because it makes no sense. I am also pretty amazed at the way NR's customers are behaving currently by making a run on the bank. The facts are that a) the bank is highly solvent and has assets that exceed its liabilities. the Bank of England has provided lending support to the tune of £4 bill, and c) even on the first day of this so called crisis, two major lenders have offered their services as white nights. Perhaps this is just lemming behaviour on the part of customers and of some posters on TV.

I hope you weren't referring to me. For the record, I never have heard of this bank before i saw this thread. Nor did I know there was a run on it's assets. Nor do I know why it's having troubles. I don't watch TV or read much current finacial news. I was just curious about deposit insurance as I may be a depositor one day.

[Journalist]

I disapprove of the concept of "get your money out" under these circumstances because it makes no sense. I am also pretty amazed at the way NR's customers are behaving currently by making a run on the bank. The facts are that a) the bank is highly solvent and has assets that exceed its liabilities. the Bank of England has provided lending support to the tune of £4 bill, and c) even on the first day of this so called crisis, two major lenders have offered their services as white nights. Perhaps this is just lemming behaviour on the part of customers and of some posters on TV.

1) It won't be highly solvent if the account holders all take their money out.

2) A bank's assets (its loans) are longer term than its liabilities (deposits). The asset/liability time mismatch is a structural risk of banking.

"We don't have the money, its tied up in your farm Joe, and Frank's farm" James Stewart - Its a wonderul life

Edited September 14, 2007 by Journalist

[LaoPo]

As far as I learned from all the news, Northern Rock isn't exactly in trouble although the stock dropped 32% whic IMHO is just panic selling.

The problem lies in the fact that Banks do not loan money to each other anymore (or reluctant), BECAUSE of the subprime mess. There are huge chunks of cash in the Banks and there is NO liquidity problem.

Therefore Northern Rock was having difficulties in getting access to money which, normally, isn't a problem.

Thus, the Bank of England gave them a hand.

That customers are getting out is just panic. Maybe the Tabloids made a big story out of it...?

Some Facts:

Has 6,400 staff

Has 18.9% share of new UK lending

Loans and assets of £113bn

Deposits from customers of £24bn

Northern Rock shares plunge 32%

Shares in one of the UK's largest mortgage lenders, Northern Rock, have fallen 32% after it had to ask the Bank of England for emergency funding.

But experts say it does not mean Northern Rock, which has £113bn in assets, is in danger of going bust.

http://news.bbc.co.uk/2/hi/business/6994328.stm

Northern Rock stock's movement today, September 14, 2007

Northern Rock stock's movement January - September, 2007

The last chart shows that the mortgage industry was already having problems, earlier this year.

LaoPo

[Steve2UK]

Folks, folks - just relax............ give it a month or two and this will all be yesterday's news.

Just wonder who this "Journalist" is? AKA Chicken Little (as in "the sky's falling")? Joined two days ago and already telling us to get our money out while we can....... Self-fulfilling prophecy or what? Reminds me of those self-fulfilling "stock tip" spam scams that I manage to ignore..............

Yes, there is a liquidity squeeze for now - credit crunch or whatever else you like to call it. And yes, it's a continuing surprise that so many US lenders could/would give mortgages to people with zero credit credibility who then default on the first repayment - think about it. But boom times bring speculators out of the woodwork and sometimes they just miss the tide. So, now it's time for a correction. If your money is in a solid, well-regulated outfit like Northern Rock, Nationwide etc....... it will still be there next month and next year and next decade. If you were tempted into some above-average return speculative scheme........ well, maybe it's less attractive than it seemed before.

The real factor affecting most of us in all this is that interest rates may drop for a while as part of the move to free up lending - now that does hit me in the pocket.

Edited September 14, 2007 by Steve2UK

[slimdog]

A relatively realistic portrayal of what happened to Northern Rock can be found in the Daily Telegraph:

http://www.telegraph.co.uk/money/main.jhtm...4/cnrock314.xml

Quoting from the article:

The issue here is a technical one and what is really at stake is the company's growth plans.

The technical issue is quite complicated and comes back to those US sub-prime mortgages. Because banks still don't know where some $100bn-$200bn of bad sub-prime debt may emerge, they are not lending to anyone. This inter-bank market greases the wheels of the financial system but it has shut down.

Some banks raise most of their money from the likes of you and I - in retail deposits such as current or savings accounts. They then lend it back to us at a higher rate of interest. Others raise most of their funding in the inter-bank market. Northern Rock is one of the latter and, because those markets are closed to business, so is it.

Customers with existing fixed rate mortgages have nothing to worry about because Northern Rock locked in its financing at the time the deal was offered. But those on floating rate mortgages will almost certainly find themselves paying a higher rate soon.

Northern Rock finances those "Standard Variable Rate" mortgages every three months. The latest round of financing has come up and, through no fault of its own, no one was willing to lend. So it has had to tap the Bank of England at a penal rate.

also

It is important to remember that this is not a Barings. Northern Rock has done nothing to orchestrate its own downfall. If anything, the banks in the US who have sent tremors through the market by lending to uncreditworthy households are to blame for gumming up the global financial system.

[Carmine6]

As far as I learned from all the news, Northern Rock isn't exactly in trouble although the stock dropped 32% whic IMHO is just panic selling.

The problem lies in the fact that Banks do not loan money to each other anymore (or reluctant), BECAUSE of the subprime mess. There are huge chunks of cash in the Banks and there is NO liquidity problem.

Therefore Northern Rock was having difficulties in getting access to money which, normally, isn't a problem.

Thus, the Bank of England gave them a hand.

That customers are getting out is just panic. Maybe the Tabloids made a big story out of it...?

Some Facts:

Has 6,400 staff

Has 18.9% share of new UK lending

Loans and assets of £113bn

Deposits from customers of £24bn

Northern Rock shares plunge 32%

Shares in one of the UK's largest mortgage lenders, Northern Rock, have fallen 32% after it had to ask the Bank of England for emergency funding.

But experts say it does not mean Northern Rock, which has £113bn in assets, is in danger of going bust.

http://news.bbc.co.uk/2/hi/business/6994328.stm

Northern Rock stock's movement today, September 14, 2007

Northern Rock stock's movement January - September, 2007

The last chart shows that the mortgage industry was already having problems, earlier this year.

LaoPo

Yes, this was part of that short term paper rollover problem. Banks borrow and lend to each other all the time for very short periods. There has been a little bit of a cycle where banks have been less able to borrow short term so they've had to keep more cash and then were less likely to lend short term themselves. So Northern Rock had to borrow from the Bank of England.

Note that in the US, banks have been doing this for several weeks, and there's been no runs on the banks. The difference is that the Bank of England portrayed assistance to banks as bailouts. In the US, the Fed talked B of A, Citibank, and Wacovia into to borrowing $500 million each at the discount window to reduce the stigma of doing so. There's been a huge difference in perception as a result. $7 billion was borrowed from the Fed short term in the US last week and no one would even know it.

Edited September 14, 2007 by Carmine6