Northern Rock goes to BoE in cash crisis
- 18th September 2007
- Buying Property News
As this major UK lender receives a 'sub' from the Bank of England, borrowers and savers worry about the future.
With the rising cost of credit the Northern Rock - Britain's third largest mortgage provider - was left unable to arrange loans and so had to ask the Bank of England for a cash handout. Seen as a last resort, the move has worried both the industry and customers. Whilst thousands of Northern Rock customers are withdrawing their savings, experts say that panic is not necessary.
Today, the FTSE 100 index fell by more than 50 points as the Bank of England’s bailout of Northern Rock causes ripples through the banking sector. However, City traders comment that the damage could have been far worse and that the market showed resilience to renewed fears about a credit crunch.
Tim Hughes, head of sales trading at IG Index, said: “We are down 50 points but it is nowhere near as bad as it could have been.
“What has happened with Northern Rock is unprecedented, clearly, but it is not the biggest surprise in the world.
“It is looking down the barrel of a gun and its business model has been exposed, but it would be far more worrying if a bigger bank needed help from the Bank of England.”
``There is no risk,'' said James Hamilton, an analyst at Numis Securities in London: "The Bank of England said Northern Rock is solvent.As credit turmoil will return to normal, Northern Rock's business will as well.''
Experts predict that the Northern Rock could survive savers withdrawing savings.
Will other lenders ask the Bank of England for cash?
Many other banks do not rely on credit markets in the same way as Northern Rock. Northern Rock bank is differs from many other mortgage lenders who fund their lending to homeowners by using customers’ savings. Instead Northern Rock raises a large proportion of the money it lends by bundling up its loans and selling them on the market.
Are savers right to withdraw their savings from Northern Rock?
Only the National Savings & Investments, the government-backed institution, offers a cast-iron guarantee of the safety savings.
Northern Rock is trying to reassure savers that their savings are secure. But if the Northern Rock did go bust, only savers with less than £2,000 would get a full refund of their savings from the Financial Services Compensation Scheme (FSCS). The FSCS will only refund 90 per cent of the next £33,000 in savings. Savers with £50,000 upwards will likely only receive compensation of £31,700.
Kevin Mountford, head of savings at moneysupermarket.com, says: "No matter who your savings are with though, it is always a good idea to have no more than £35,000 with any one bank or building society. Spreading your savings helps protect most of your cash under the Financial Services Compensation Scheme.”
Will mortgage customers have to pay more?
If you are on a fixed rate, you're protected from paying more until the end of the loan term. However customers with discount or tracker loans will probably end up paying more. Northern Rock will likely be forced to rate its standard variable rate and no longer be offering cheap remortgages.
Other lenders are likely to tighten their lending criteria with ‘loan to value’ falling. On the plus side, savers rates have been increasing with some at 7% for the first time in 6 years.
Why has this happened to Northern Rock?
This is all a knock-on effect of what happened in the USA sub-prime market. Institutions are increasingly wary of lending to mortgage lenders in this current climate following the shockwaves of the US sub-prime 'slime' emerging on 9th August. This has made it virtutally impossible for Northern Rock to raise funding and so it had to appeal to the Bank of England.
"... it would be far more worrying if a bigger bank needed help from the Bank of England.”
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