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UK Govt Offers Big Mortgage Bank Emergency Loan

Via NY Transfer News Collective  *  All the News that Doesn't Fit
 
The New York Times - Sep 14, 2007
http://www.nytimes.com/2007/09/14/business/worldbusiness/14cnd-bank.html


British Lender Offered Emergency Loan

By ERIC PFANNER

LONDON, Sept. 14 "British financial authorities said today that they
had extended an emergency loan to rescue a big mortgage bank, as the
effects of a global credit crunch stemming from the crisis in the
American subprime lending business spread to one of the worlds most
buoyant housing markets.

The British government said it had authorized the Bank of England to
provide a liquidity support facility of unspecified size to Northern
Rock, a mortgage lender based in Newcastle, England, that has expanded
aggressively in recent years.

The news prompted a sell-off in the shares of Northern Rock and other
British bank stocks as investors worried about the possibility of
similar problems at other institutions, as well as threats to the
broader economy.

The FTSE 100 share index had fallen by more than 130 points by around
noon in London today.

Northern Rocks need for emergency financing represents a significant
broadening of the effects of the crisis in global financial markets,
analysts said, because until now problems at European banks have
stemmed mostly from their direct exposure to United States subprime
loans.

Northern Rock, by contrast, said it had only a small amount of subprime
loans in its portfolio, and British regulators said it has a good
quality loan book.

Instead, it ran into problems when the squeeze in capital markets
undermined the banks business model. Northern Rock has relied heavily
on raising money in the capital markets, rather than consumer bank
deposits, to finance its mortgage lending.

With other banks increasingly reluctant to extend new credit, Northern
Rock said it faced the possibility of being unable to meet existing
obligations.

The problems are potentially much wider now, said Jonathan Loynes, an
economist at Capital Economics, a consultancy in London. This means we
have to worry about a wider range of institutions that arent directly
involved in this credit crisis, but are in a way innocent bystanders.

The move came only two days after Mervyn King, governor of the Bank of
England, warned that moves by other central banks, like the Federal
Reserve and the European Central Bank, which pumped extra liquidity
into the financial system in recent weeks, could encourage excessive
risk-taking by rewarding bad behavior.

The Bank of England emphasized Friday that its lending to Northern Rock
would be conducted at a premium to market interest rates.

Copyright 2007 The New York Times


 
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