Northern Rock In BoE Rescue

by Stewart Douglas

Story link: Northern Rock In BoE Rescue

Leading UK-based mortgage lender Northern Rock has been saved by the Bank of England as its share price continues to tumble in the wake of a dire cash shortage, as announced on Friday last week.

The top-flight UK lender announced on Friday that it was in need of emergency funding to help short term liquidity, in the wake of substantial exposure to the US sub-prime lending sector.

Further, with customers queuing for several hours to withdraw funds from the lender in panic, the problems for the Northern Rock look set to continue to worsen over the next few days.

The Bank of England intervened to offer financial support to the lender on the approval of the Financial Services Authority, which regulates banks and lending practices throughout the UK, despite previously stating that it would be unwilling to offer assistance to any particular bank in the interests of fairness.

Having invested heavily in sub-prime portfolio loans, Northern Rock have fallen foul of rising interest rates and repossessions, which have tied up liquidity in litigation. The rescue package makes it the first UK lender to fall under the fallout from the US sub-prime market.

Despite its short-term problems, the FSA were quick to remind analysts that the Northern Rock is still more than solvent and has substantial capital behind it at the time being, which many analysts are predicting will make it more appealing to predators particularly in light of its low share price.

Analysts are predicting that the sub-prime crisis could potentially spread to the insurance industry, and could cost insurers up and down the country as they shell-out in re-insurance for sub-prime portfolios.

However, it remains to be seen to what extent insurers will be caught up in the debacle, and to what extent they will be willing to come to the aid of banks and lenders affected by the situation.