Bank of England to prop up Northern Rock

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Cdntrader

Bank of England to prop up Northern Rock
By Peter Thal Larsen and Neil Hume

Published: September 13 2007 21:31 | Last updated: September 13 2007 21:31

The Bank of England will on Friday step in to bail out Northern Rock by providing emergency funding to the beleaguered mortgage lender which has fallen victim to the liquidity squeeze in the banking sector.

In a highly unusual move, the Bank, working with the Financial Services Authority and the Treasury, will prop up Northern Rock by giving it short term credit which will allow to carry on operating.

It is the most dramatic development to date in the UK banking market since the financial sector was hit by a wave of market turmoil during the summer which has paralysed money markets.

The rescue will lift the uncertainty hanging over Northern Rock’s future for much of the past month because it could not get access to the wholesale funding upon which it is heavily dependent.

It will also help reassure thousands of the bank’s customers that their deposits are safe.

Northern Rock, the mortgage lender, is also set to warn on Friday that its profit growth has been hit by the liquidity shortage.

The long-awaited warning comes as banks are grappling with a sharp rise in short-term interest rates that is putting pressure on profit margins.

Northern Rock is set to issue a trading update setting out the impact of the market turmoil, according to people familiar with the matter. Barring last-minute hitches, the statement is expected before the market opens on Friday. Northern Rock declined to comment.

Since hitting their peak in February, shares in Northern Rock have lost half their value amid concerns that the rising cost of wholesale funding would squeeze margins and limit the bank’s growth.

On Thursday the shares, among the most actively shorted in the UK market, closed 33p or 4.9 per cent down at 639p.







Copyright The Financial Times Limited 2007
 
Australia, N.Z. Dollars Drop on Report of Northern Rock Funding

By Emma O'Brien

Sept. 14 (Bloomberg) -- The Australian and New Zealand dollars dropped after the British Broadcasting Corp. reported a U.K. home lender sought emergency funding, reigniting credit concerns and sapping the appeal of riskier investments.

The two currencies are favorites for the carry trade, where investors borrow cheaply in yen to put their money in countries offering higher yields. Northern Rock Plc would receive emergency financial support from the Bank of England, BBC reported on its Web site.

``The news about Northern Rock triggered selling and is weighing on carry trade sentiment,'' said Danica Hampton, currency strategist at Bank of New Zealand Ltd. in Wellington. ``We're seeing another bout of risk aversion. It's not over yet.''

The Australian dollar fell to 83.79 U.S. cents at 7:25 a.m. in Sydney from 83.96 in late Asia trading yesterday. It fell to 96.39 yen from 96.43 yen. New Zealand's dollar bought 71.17 U.S. cents, down from 71.42 cents. Against the yen, it was at 81.90 from 82.04.

The Australian and New Zealand dollars are the worst- performing major currencies against the U.S. dollar and yen in the past two months, after increasing U.S. subprime mortgage defaults squeezed credit and sparked fears of a global economic slowdown.

Investors earn the spread between borrowing cheaply in yen, where the benchmark interest rate is 0.5 percent, an investing in New Zealand, with a benchmark rate of 8.25 percent or Australia, at 6.5 percent.

Carry trades utilizing the New Zealand dollar lost 0.9 percent today, after rising 1.9 percent yesterday.

To contact the reporters on this story: Emma O'Brien in Wellington at eobrien6@bloomberg.net .

Last Updated: September 13, 2007 17:31 EDT
 
I take my chances here - I am long AUD.
This removes some uncertainty from the UK market as NRK was a danger for quite some time. Still - pretty strange they are helping them out. let's see.
 
Quote from dhpar:

I take my chances here - I am long AUD.
This removes some uncertainty from the UK market as NRK was a danger for quite some time. Still - pretty strange they are helping them out. let's see.
More...


better idea.long yen;)


hmm now bonds movin., U.S. futures dwn.....lots of trade ideas.
 
agree. shorted few notes at good price. i do not think this news has really any significant value - especially when you read the FT version. it will be over during the european morning. typical panic.
 
Quote from dhpar:

agree. shorted few notes at good price. i do not think this news has really any significant value - especially when you read the FT version. it will be over during the european morning.
More...


u think? The perception seems to be that it opens up a whole other can of worms. How many other banks need a bailout?

mkts don't like open ended uncertainty.
 
what do you mean by "open can of worms". Everybody knew about NRK - look at the stock price...

but you are right - markets may behave strangely sometimes (that's why I added only a little;)
 
Yen Gains on Report U.K. Home Lender Sought Emergency Funding

By David McIntyre

Sept. 14 (Bloomberg) -- The yen gained against the dollar, euro and pound after the British Broadcasting Corp. reported U.K. home lender Northern Rock Plc applied for emergency funding from the Bank of England, spurring investors to repay loans in Japan.

Japan's yen has strengthened against all 16 most-active currencies in the past two months as losses stemming from U.S. subprime mortgages prompted investors to reduce riskier investments in higher-yielding assets. The yen also advanced against the Australian and New Zealand dollars, favorites of so- called carry trades.

``Northern Rock isn't a small company and it caused another round of risk aversion,'' said Tony Morriss, a currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney. ``The yen gained on this and the pound was slammed.''

Japan's currency rose to 114.76 per dollar at 8:21 a.m. in Tokyo from 115.08 late in New York yesterday. The yen advanced to 159.16 per euro from 159.79 and may reach 158.50 today, Morriss forecast.

The yen climbed 0.8 percent versus the pound to 231.26 and has risen from a 16-year low of 251.14 yen reached July 23. Against the Australian dollar it rose 0.8 percent to 95.72 yen and versus New Zealand's it added 0.9 percent to 81.22 yen.

The loan to the Newcastle, northern England-based mortgage lender would be provided at a punitive rate of interest, the BBC said on its Web site, without specifying how much the loan would be or the rate of interest.

Northern Rock gains a higher proportion of its funding from the money markets than rivals such as HBOS Plc that can rely on customer deposits, making it more vulnerable to rising borrowing costs, Collins Stewart analysts have said. A BOE spokesman declined to comment when contacted by Bloomberg News.

The U.K. central bank yesterday relaxed restrictions on the amount of money financial institutions need to hold with the central bank, encouraging them to lend more to each other.

Weekly Loss

Japan's 0.5 percent interest rate is the lowest among major economies. That compares with 4 percent in Europe, 5.25 percent in the U.S., 5.75 percent in the U.K., 6.5 percent in Australia and 8.25 percent in New Zealand.

In carry trades, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the borrowing and lending rate. The risk is that currency moves erase those profits.

Japan's currency still headed for a weekly decline against all 16 of its most active counterparts as lower volatility in foreign-exchange markets and rising stocks encouraged purchases of higher-yielding assets overseas.

Implied volatility on one-month dollar-yen options remained unchanged at 11.38 percent from yesterday, when it touched 10.45 percent, the lowest since Aug. 10. Lower volatility may encourage carry trades, as it implies smaller exchange-rate fluctuation risk.

To contact the reporter on this story: David McIntyre in Sydney at dmcintyre2@bloomberg.net

Last Updated: September 13, 2007 19:24 EDT
 
The credit crunch
How the Governor lost his eyebrows
Richard Northedge


‘Bank of England denies NatWest rescue move,’ screamed an Evening Standard headline in December 1974 as the credit squeeze strangled the clearer most exposed to the secondary banks that were falling like dominos. This month the Bank has been denying it has just rescued Barclays: the £1.6 billion lent at short notice was not an emergency loan, it insists, simply the use of a strategic safety valve.

Just as well, because it is no longer the Bank of England’s job to go round rescuing banks that run out of money. When Gordon Brown put the Bank in charge of setting interest rates a decade ago he took away its role as the supervisor of the banking system. The Governor at the time, Eddie George, did not think much of the idea, but having allowed the secondary banks to boom until they bust and let Johnson Matthey and BCCI slip through its hands, the Bank might well have thought supervision an impossible task best handed over to the clever-clogs at the new Financial Services Authority.

The rumours circling Barclays, with its ‘SIV-lite’ hedge funds, and Northern Rock, with its sub-prime lending, are thus the first test of the FSA’s handling of a potential banking crisis. Unfortunately, unlike the Bank, the FSA has no money. It could not rescue a bank even if it wanted to.

Brown’s changes after the 1997 election trimmed the three legs of the Bank of England to two. It lost banking supervision, but retained responsibility for financial stability and the use of interest rates to maintain monetary stability. The Brown regime means if an individual bank gets into trouble, it is a matter for the FSA at Canary Wharf, but if all banks get into difficulties, it is for the Old Lady of Threadneedle Street to sort out the mess.

True, if Barclays got into real difficulties it would cause enough panic to threaten the stability of the whole financial system and the FSA would hand the problem straight back to the Bank. But a lesser lender would have to put up with whatever first aid the FSA could muster, rather than enter the Bank’s intensive-care ward.

What was lost in the move to Docklands was the power of the Governor’s famous eyebrows, which used to be raised if a bank took undue risks. Mislaid too was the ability to inject senior Bank of England directors into banks like Midland that had lost their way. The FSA and the Bank do talk, of course — they join a monthly pow-wow with the Treasury to discuss impending crises — but it is the Bank that has the firepower even though the regulator has the responsibility. That’s why the Bank had to change its rules this week and allow the clearers to borrow 25 per cent more than they usually do to settle their bills.

In effect, it is the clearers’ own money they are withdrawing. But if they were required to keep the cash on deposit in Threadneedle Street for prudent reasons, then giving it back to them because they are financially squeezed must increase the risk to the whole financial system. Northern Rock would be foolish to throw more money at its cash-strapped sub-prime borrowers; surely the nation’s bank manager should set a better example?

The snag is, the bank manager has got his prices wrong. Last week, the monetary policy committee kept Bank Rate unchanged for fear of appearing to panic. But the 5.75 per cent official rate contains no risk premium and, belatedly, depositors are realising that even banks are risky. Banks that should have assessed their customers’ creditworthiness and charged accordingly are now finding themselves subject to the same scrutiny — by other banks. They are reluctant to lend to each other at close to Bank Rate — hence Northern Rock, berated in the City, has returned to its building-society origins and is asking the public to provide the funds for its risky mortgages instead. And the public, rattled by headlines about the beleaguered mortgage lender, is charging Northern Rock 6.71 per cent for the privilege.

With credit-card companies raising their interest rates and manufacturers having to renew overdrafts at a percentage point higher than before, the MPC’s rate is losing relevance. It is an official rate bearing little relation to reality. Telling the public that rates are unchanged when they are patently rising will not fool many for long. We should not be surprised if legal contracts and savings products with penalties and returns linked to Bank Rate abandon that benchmark in favour of market rates.

If the rate-setting leg of the Bank withers too, it will have only financial stability to stand on — and one leg is fundamentally unstable. Time may well bring inter-bank market rates back to the MPC’s rate but — until memories fade — the new understanding of risk will ensure that borrowers, including banks, pay the right price for their money.

Headline writers get ready: NatWest, Barclays and even Northern Rock may yet rescue the Bank of England from its reluctance to set Bank Rate at the market level.
 
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