/ 14 September 2007

UK bank hit by credit problems

Shares in British bank Northern Rock plunged by a quarter on Friday as clients rushed to withdraw their savings following an emergency bail-out of the lender by the Bank of England.

The central bank came to the rescue of Britain’s fifth-biggest home-loan provider, which is facing severe difficulties raising cash on money markets amid the ongoing global credit squeeze.

From London to Edinburgh, panicking customers queued outside Northern Rock branches to get hold of their savings, despite government ministers and Bank of England (BOE) officials appealing for calm.

“I have withdrawn all my money,” said one worried customer who wished to remain anonymous outside a branch in Harrow, north west London.

“I know everyone has been urged not to panic but I just felt safer moving the money somewhere else rather than worrying about Northern Rock’s financial position over the next few days,” she added.

Northern Rock is the first major British financial institution to be severely hit by the credit crunch sparked by the United States home-loan crisis.

As well as hitting lenders globally, the world credit squeeze played a major part in the dollar slumping to a record low against the euro this week, and caused stock markets to plunge earlier this month.

Northern Rock warned on Friday that its 2007 profits would be up to £147-million lower than expected, sending its share price plunging by a quarter in London trading.

Britain Finance Minister Alistair Darling, who authorised the BOE to help the bank, said its problems might have been avoided had US banks not been so willing to offer cash to borrowers with poor credit histories.

A global credit crunch erupted last month, sparked by a crisis in the US subprime, or high-risk, mortgage sector.

Banks became nervous about lending to each other because of fears about bad investments linked to US home loans, leading to a shortage of cash for lending purposes.

Central banks around the world have pumped billions of dollars of emergency funds into the banking sector to enable banks to continue normal lending practices.

“The Chancellor of the Exchequer has today [Friday] authorised the Bank of England to provide a liquidity support facility to Northern Rock against appropriate collateral and at an interest rate premium,” the BOE said Friday in a statement.

“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.”

The amount of emergency loans required by Northern Rock was not specified.

Chancellor of the Exchequer Darling said it had been “some time” since the Bank of England had been placed in such a situation, while some commentators suggested it last occurred about 30 years ago.

“My objective all the time is not just to have a strong and stable economy but to ensure we’ve got stability in the banking system,” Darling told BBC radio.

“That is why I authorised the Bank of England to provide that support for Northern Rock, it was the right thing to do.”

In a veiled attack of US banks’ handling of home loans, Darling added: “Right across the world, banks and financial institutions do need to be clear who they are lending to.

“If you look at the root causes of all this problem in the United States, perhaps if someone in America had actually looked closely at who they were lending the money to … then some of these problems might have been avoided.”

Northern Rock’s chief executive Adam Applegarth said Friday that the banking sector was “seeing extreme conditions in global liquidity, which have impacted on world markets”.

“As a result, we have taken prudent action to rein back our lending until markets normalise. Against that background it is inevitable, albeit disappointing, that our profits will be affected,” he said. — AFP