Northern Rock, one of the UK's largest mortgage lenders, has had to take an emergency loan from the Bank of England.
News of the loan has caused Northern Rock shares to plummet by 23% in morning trading.
Earlier this week, Bank of England governor, Mervyn King, wrote a letter to the Treasury Select Committee saying the Bank would provide emergency loans for lenders running into temporary difficulty as a result of the current market troubles.
Analysts say the fact the BoE is willing to loan to Northern Rock indicates the company is not at threat of going into liquidation. However, the company is having difficulty borrowing from other lenders due to nervousness among banks and investors when lending to mortgage lenders, particularly those lending to sub-prime customers.
Northern Rock will have to pay a penal rate of interest for the loan at over 1% above the BoE base rate.
The news sent shares down 23% this morning which is bad news for Northern Rock’s investors who have seen shares lose half their value over the past six months. Other banks' shares were also down following the news.
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“The issue facing lenders at the moment is one of liquidity and funding, not lending quality.
“Northern Rock's savers and borrowers can therefore have confidence that the loan arrangements with the Bank of England do not reflect any underlying business problems, but are a reflection of a general lack of confidence in the financial markets, which is making it more difficult for all lenders to raise funds from the markets.
"Consumers need to understand that the problem for lenders generally at the moment is in raising funds, not in lending quality.
"The Bank of England would not have provided the loan to Northern Rock if it had concerns about the quality of the lender's own business.
"All lenders are facing funding pressure at the moment, and what they need is a return to more normal market conditions as quickly as possible. We welcome the Bank's intervention and confirmation that it is keeping a close eye on the situation."
Michael Coogan is director general of the Council of Mortgage Lenders.IFAonline
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