Q&A: crisis at Northern Rock
Updated on 17 September 2007
What does the Bank of England's decision to offer an emergency loan to the mortgage provider mean?
What has prompted the emergency loan offer?
The Northern Rock bank specialises in providing mortgages - it was the UK's biggest provider of mortgages in the first half of this year. What is more, it only has a small deposit base. In other words, it does not offer a wide range of products to would-be savers.
This means Northern Rock has to raise money to provide mortgages on the money markets. And the liquidity crisis prompted by the recent turmoil in the US "sub-prime" sector has pushed the cost of lending between banks (the interbank rate) to its highest level for nine years.
Are other banks in the same situation?
It is hard to say, although the high interbank rate reflects an underlying lack of confidence in the markets. Northern Rock's business model, with its emphasis on the provision of mortgages as against other aspects of banking, has made it particularly vulnerable.
Barclays had to borrow £1.6bn from the Bank of England at the end of August because its Barclays Capital arm had lost money buying and selling loan packages. But this was not the consequence of any exposure to the mortgage market on Barclays' part .
Will Northern Rock investors be affected?
The Financial Services Compensation Scheme guarantees 100 per cent repayment on savings of up to £2,000 and 90 per cent repayment on the next £33,000.
That means an saver who lost savings of £35,000 would receive compensation of £31,700. However, any money above the £35,000 threshold could be at risk.
Responding to the Bank of England's decision to offer the emergency loan, a treasury statement last week said: "The FSA (Financial Services Authority) judges that Northern Rock is solvent, exceeds its regulatory capital requirement and has a good quality loan book."
And Angela Knight of the British Bankers' Association told BBC Radio's Today programme on Friday that "anybody who is waking up this morning who is either a saver with Northern Rock or has got a mortgage... can be absolutely confident that they have got their money with, or they have borrow from, a very sound financial institution.
"This isn't about insolvency. This is about a short-term problem."
Will Northern Rock mortgage holders be affected?
The current wisdom is that with its shares plummeting, Northern Rock could be bought up by another bank or building society. In that event, a Northern Rock mortgage would have to be repaid to the new owners.
Will it affect mortgage holders in general?
Mortgages are likely to become more expensive in the coming months, particularly for those with a poor credit history.
And despite the treasury's pledge to help out financial institutions hit by the liquidity squeeze, banks may not enjoy an easy ride in the foreseeable future.
