Northern Rock loaned another £2.7bn

Northern Rock appeared to have borrowed another £2.7bn (€3.7bn) from the Bank of England this week amid signs of a further tightening in financial markets.

Northern Rock appeared to have borrowed another £2.7bn (€3.7bn) from the Bank of England this week amid signs of a further tightening in financial markets.

The embattled mortgage lender’s debts are now thought to total more than £29bn (€40bn), according to analysis of the Bank of England’s latest balance sheet figures today.

The news comes as the Bank of England announced it would pump £10bn (€14bn) of extra funding into the banking system to head off a New Year credit market freeze.

Banks are becoming increasingly reluctant to lend to each other, sending daily interbank lending rates soaring for the 14th day in a row yesterday, to 6.59%.

Fears are mounting that the credit crisis could get even worse at the turn of the year as banks hoard money to tidy up their balance sheets for end of year reporting.

The Bank said it was making the funding available over a five-week period at the 5.75% base rate level to help ease the potential New Year squeeze.

Fellow central banks in the US and Europe have also injected cash into financial markets to boost liquidity.

The Bank said the cash was not being made available on an emergency basis, stressing the move was only to “alleviate concerns” over year-end money market conditions.

But Mervyn King, the Bank’s Governor, warned at a Treasury Select Committee hearing today that there was “a big risk” that the collapse in credit markets would become more serious.

He told MPs that a fear among banks, in the US in particular, over losses due to America’s default-hit sub-prime mortgage market was causing them to clamp down on interbank lending.

He said: “We stand ready to take further measures in order to keep the overnight rate in line with Bank Rate. We are keeping money markets under constant review.”

MPs questioned whether the multibillion-pound loan to Northern Rock was affecting the Bank’s ability to help ease liquidity in financial markets.

Mr King sought to reassure that the Bank was not restricted by the Northern Rock funding facility.

Northern Rock first called on the lender of last resort facility in mid-September after the credit crisis saw its funding lines dried up.

The news sparked a run on the bank – the first on a UK bank in nearly 150 years.

The lender is now at the centre of a takeover saga, with firms such as Richard Branson’s Virgin group vying to snap up the group.

Virgin’s bidding team is proposing to repay £11bn (€15bn) of Northern Rock’s Bank of England loans immediately under its takeover plans, with a clear path towards repaying the remainder.

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