Top UK lender in emergency appeal as markets bite

Mortgage lender Northern Rock has called on emergency funding from the Bank of England to help it through the credit market crisis, it has emerged.

In a highly unusual move, the Bank, in consultation with regulators and the Treasury, will step in to give short-term credit to Northern Rock to help it through the squeeze on liquidity, according to sources.

Experts have been quick to reassure customers that they will not be affected, but the latest development is the most dramatic example yet of the impact of the drying up of the money markets.

Northern Rock will be bailed out by the Bank of England in its capacity as “lender of last resort”.

As such, the mortgage firm will be provided with short-term credit which is likely to be charged at a higher rate of interest.

This move will give Northern Rock a degree of liquidity at a time when it is struggling to raise cash through its usual route, wholesale borrowing.

It is believed to be the first time in many years that the Bank of England has been called upon in such a way, although last month Barclays was forced to borrow emergency funding due to a “technical breakdown” in the UK clearing system.

Speaking on BBC Radio 4’s The World Tonight on Thursday, Eric Leenders, executive director of retail at the British Bankers’ Association, said: “We have to keep a sense of proportion and we have to recognise that we are in exceptional circumstances.

“It is important to recognise that we need lenders like Northern Rock that will develop innovative products that are going to encourage access to financial services that will be beyond the gift of many people.

“It is important that we have a central bank that supports institutions such as Northern Rock over temporary issues that are caused to an extent by circumstances outside their gift.”

Responding to Northern Rock’s move, Ray Boulger, senior technical manager at mortgage broker John Charcol, said: “It is unusual. Banks will try to arrange things so they do not go to the lender of last resort. Clearly Northern Rock has had difficulties raising money from their usual sources.”

Justin Urquhart Stewart of Seven Investment Management, said: “This is the Bank of England saying we support the banking system but do not take this as an indication of us propping up investment banks.”

Customers were being told not to panic, as the move should not affect them.

Treasury select committee chairman John McFall said: “I don’t think customers of Northern Rock should be worried about their current accounts or mortgages.

“The fact that the Bank is willing to act as lender of last resort should be reassuring, because it means they think the problems are temporary.”

The move by Northern Rock is the latest indicator that tighter credit conditions are squeezing UK banks.

Yesterday, a £4.4bn (€4.4bn) relief fund offered by the Bank of England was drained by banking giants in less than an hour.

The Bank pumped the extra cash into the system in a bid to ease soaring overnight inter-bank borrowing interest rates.

The move failed to prevent banks from taking a hit in the market yesterday.

Shares in Northern Rock dived by 5% and Alliance & Leicester suffered a 3% decline.

Further woes could befall Northern Rock today if, as reported in today’s Financial Times, it issues a warning that its profit growth has been hit by the liquidity shortage.

The tumbled in mortgage lender’s share price came amid concern that the credit squeeze was forcing them to increase mortgage rates for customers.

Halifax, which accounts for one in every five mortgages in the UK, said it was increasing the rate charged on 20 of its tracker mortgages for new customers by between 0.1% and 0.2%.

A day earlier, Britain’s second biggest lender Abbey announced it is increasing its tracker mortgage rates by the same amount for new customers.