Mumbai:
The Bank of England stepped in to rescue mortgage lender Northern Rock as the
group, which has lent aggressively to home buyers, saw a run on its deposits as
customers crowded into branches in London to pull out their savings. Northern
Rock, Britain''s third-largest mortgage provider, sought emergency funding from
the Bank of England as rising cost of credit left the lender unable to make new
loans and stoked concern among customers about their money. Northern
Rock is Britain''s biggest casualty of a global financial crisis sparked by US
mortgage defaults. This is also the nation''s biggest bailout of a financial institution
in30 years. Queues
stretched into the streets as customers waited to withdraw savings from Northern
Rock branches, with some reports of fighting in its hometown of Newcastle. The
central bank''s support the first time it has acted as lender of last resort
on such a scale after becoming independent on interest rate policy in 1997
puts a prop under Northern Rock, which has been hit by banks'' reluctance to lend
as they hoard cash to cope with the fallout from bad US loans. The
British government said it has authorised the Bank of England to provide an unspecified
amount of liquidity to Northern Rock, which had the biggest share of the new mortgage
market in the first half of this year. Bank
of England, meanwhile, said Northern Rock is solvent and only in need of short-term
help. Finance
minister Alistair Darling told BBC Radio that Northern Rock is the only institution
to have called for central bank aid and that Britain''s economy and banking system
is sound. "There
is plenty of money in the system, the banks have got money ... they are simply
not lending in the short-term way that institutions like Northern Rock need,"
he said. Interbank
lending rates in UK rose to their highest levels for nine years this week as banks
scaled back lending to each other. Northern
Rock declined to comment on the details of the financial package, though chief
executive Adam Applegarth said, "clearly a substantial amount is required"
and that it would be charged a penalty interest rate. The
firm said higher funding costs and a decision to rein in lending would hit profits
this year and next, and that there could be job losses among its 6,000 staff.
Its shares, already down almost 50 per cent this year, plunged a further 25 per
cent. Other banks,
like Barclays, have obtained overnight funding under the Bank of England''s standing
emergency lending facilities, but the package for Northern Rock was the first
time the Bank has been called on for longer-term help during the current crisis. The
Bank of England had said earlier this week that it would not bail out insolvent
companies. The
Financial Times Deutschland, meanwhile, said some large British lenders
were borrowing cash from the European Central Bank via subsidiaries because of
the Bank of England''s reluctance to lend.
also see : General
reports on Banks & Financial Institutions
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