BoE offers emergency support to Northern Rock

The Bank of England has offered an emergency loan to Northern Rock after the mortgage lender became the biggest British casualty so far of the credit squeeze sparked by the crisis in US sub-prime mortgage markets.

Britain's Finance Minister said yesterday he had authorised the Bank of England to provide an unspecified amount of financial support to Northern Rock, which was the country's biggest mortgage lender in the first half of this year.

While it has no exposure to sub-prime loans, Northern Rock has proved vulnerable to the liquidity squeeze triggered by the US sub-prime lending crisis because it has a small deposit base and so has to draw most of its funding from money markets.

Inter-bank lending costs rose to their highest level for nine years this week as banks scaled back lending to each other.

Northern Rock said yesterday that a decision to rein back lending and the higher cost of funding would hit profits this year and next. It said it now expecting an underlying 2007 pretax profit of £500 to £540 million, compared with analysts' current consensus forecast of £647 million.

It also expected a "consequential impact" on 2008 profit.

Northern Rock said the amount of emergency funding it is seeking from the Bank of England "is clearly a substantial amount" and there was no specific cap on its size. "I'm not able to tell you the (interest) rate or the size other than it is clearly substantial," Northern Rock CEO Adam Applegarth told reporters on a conference call.

Mr Applegarth said he could not predict how long the liquidity squeeze would last, but said he expected the Bank emergency funding function to last "a sufficient duration to see us through the liquidity squeeze. The decision to provide a liquidity support facility to Northern Rock reflects the difficulties that it has had in accessing longer term funding and the mortgage securitisation market, on which Northern Rock is particularly reliant," the government said in a statement yesterday written in conjunction with the Bank of England and Financial Services Authority (FSA).

"The FSA judges that Northern Rock is solvent, exceeds its regulatory capital requirement and has a good quality loan book," it added.

The Bank of England said earlier this week it would not bail out insolvent institutions.