Northern Rock Gets Emergency Bank of England Funding (Update1) By Ben Livesey and Jon Menon
Sept. 14 (Bloomberg) -- Northern Rock Plc, the U.K.'s worst performing bank stock this year, said the Bank of England agreed to provide emergency funds to ease a ``severe liquidity squeeze'' sparked by U.S. subprime mortgage defaults.
The central bank will provide the nation's fourth-largest home lender with a short-term credit line to keep it operating, the Newcastle, England-based company said in a statement today. Northern Rock is vulnerable to funding constraints triggered by the crisis as it has a smaller deposit base than larger lenders.
Profit will be hit this year after interest rates climbed more than expected, the bank said. ``Given the slowing of asset growth resulting from the credit and liquidity turmoil, Northern Rock now expects underlying profit before tax for 2007 will be around 500 million pounds ($1 billion) to 540 million pounds, compared with 588 million pounds in 2006,'' the bank said.
``The outlook for 2008 will depend on the speed of the recovery in global wholesale funding markets and where interest rate spreads stabilize in the global wholesale funding markets, as well as the evolution of the company's business model,'' the bank said. ``Northern Rock remains well capitalized.''
The Bank of England, U.K. Treasury and Financial Services Authority issued a joint statement confirming the move. The Bank of England is ``ready to make available facilities in comparable circumstances, where institutions face short-term liquidity difficulties'' as the U.K.'s lender of last resort, they said.
Bank `Solvent'
``This liquidity 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,'' they said. ``Northern Rock is solvent, exceeds its regulatory capital requirement and has a good quality loan book.''
Credit-default swaps based on Northern Rock's debt rose 35 basis points to 165 basis points, according to Deutsche Bank AG prices.
Northern Rock's shares have fallen 46 percent this year, more than the nine-member FTSE All Share Banks Index, which has dropped 12 percent, on investor concerns credit costs will hurt profits.
The Bank of England yesterday 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 crimp economic growth.
Yesterday's action by the U.K. central bank was its first to help credit markets since the subprime market collapsed. Governor Mervyn King yesterday indicated the bank 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.''
Commercial banks, which agree to hold a specific amount of money at the Bank of England at the end of each month-long maintenance period, can now undershoot that target by 37.5 percent to free up cash if needed. That compares with the usual limit of 1 percent.
To contact the reporter on this story: Ben Livesey in London blivesey@bloomberg.net
Last Updated: September 14, 2007 02:29 EDT
