Northern Rock may have received more than £10 billion now from the Bank of England, according to New Star’s chief economist Simon Ward.
He points out that the “Other assets” on the Bank of England’s balance sheet – the category that includes the Bank’s “lender of last resort” support to Northern Rock – rose by a further £2.9 billion in the week to October 3 following a £4.9 billion gain in the previous week.
Ward says that “Other assets” have now increased by £10.7 billion since September 12, just before the run on the troubled mortgage lender.
“Other assets” is a residual category covering a range of Bank activities and according to Ward, showed limited variation before the Northern Rock crisis.
Ward says that it is possible that some of these activities have contributed to the recent surge but the bulk of the increase is likely to reflect lending to the mortgage bank.
New Star points out that there is speculation that the Bank has been providing covert support to other institutions facing funding difficulties but this would be at odds with recent evidence from Mervyn King, the Bank’s governor, to the Treasury Select Committee.
In this he claimed that the Market Abuses Directive of 2005 prevented the Bank from conducting covert “lender of last resort” operations.
The estimated £10 billion plus size of the Northern Rock loan compares with the Bank of England’s capital and reserves of £1.9 billion at February 28, according to its latest annual report.
Ward says that the Bank of England’s capital arguably needs to be increased if it is to be expected to conduct emergency operations on the present scale.