LONDON – The Bank of England provided emergency funding to mortgage lender Northern Rock PLC yesterday after the bank, citing the global credit squeeze triggered by the U.S. subprime mortgage crisis, said it was unable to line up short-term loans from other financial institutions.
Even after the central bank issued a statement saying Northern Rock was solvent, slow moving lines of customers snaked through its doors to make withdrawals.
“I would not put a penny into that company again,” said Tony Looch, a 68-year-old customer, who withdrew his savings after standing in line for nearly two hours outside a branch in central London. “There are a lot of older people who must be really scared.”
Shares in the bank plunged 31.46 percent to 438 pence ($8.88) in London as revelations of a cash shortage spooked investors.
Northern Rock CEO Adam Applegarth announced that profits would fall to between 500 million and 540 million pounds ($1 billion and $1.1 billion) – as much as 147 million pounds ($298 million) less than expected.
The bank has been unable to raise funds since last month when the wholesale money markets it relied on for cash choked up. Applegarth said the problem was likely to continue for the rest of the year as bad U.S. loans continue rattle the market.
“We can't tell when the global (credit) freeze is going to unwind. On that basis, it made sense to get this facility now,” he told Sky News. He did not disclose how much the bank had borrowed.
Financial experts, agreed, saying there was little risk of the bank, which holds 113 billion pounds ($226 billion) in assets, would collapse.
That meant little to investors, who began dumping shares of other British banks. Alliance & Leicester PLC and Bradford & Bingley fell between 6 and 7 percent yesterday. HBOS PLC and Barclays PLC fell by around 3.5 percent.
Treasury chief Alistair Darling said there was no threat of insolvency at the bank and urged customers not to panic.
“There's plenty of money in the system,” he said. “All the banks have money, but at the moment they're not lending to each other in the way they usually do.”
“This isn't about solvency, this is about a short-term problem that the Northern Rock has in getting liquidity – that is, getting some cash from the normal interbank lending market,” said Angela Knight, chief executive of the British Bankers' Association.
The Bank of England's intervention is the first of its kind since it assumed the role of “lender of last resort” when it was made independent from the British government in 1997.
