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Northern Rock versus Bank of England

After a fun-filled press trip to Brussels with BM Solutions to hear all about its inaugural European buy-to-let research, I return to find arguments between Northern Rock and the Bank of England have been the major talking point this week.

At the Treasury select committee’s grilling of the Northern Rock board on Tuesday, chief executive Adam Applegarth told MPs he believed there was nothing more he could do to have stopped the crisis and risk committee chairman Derek Wanless said that “no reasonable professional” could have foreseen the episode happening.

At the three-hour long meeting, Applegarth laid blame with the Bank of England for not offering the lender of last resort facility option to a suitor before the run on the bank began. He said he believed this may have stopped the crisis from happening.

But the Bank of England has been quick to reject the suggestion that it was to blame for the run on the bank.

In a statement sent out the following day the Bank says it was approached on the weekend of September 8-9 by a potential bidder wanting loans of up to £30bn – over one to two years without a penalty rate of interest – as part of the deal.

The BoE said: “The authorities including the Bank of England recognised the advantages of a takeover. They also agreed that in the circumstances it would be inappropriate to help finance a bid by one bank for another.”

It also said offering such a loan facility would have broken rules on central banks offering state aid.

Northern Rock approached the Bank of England for emergency funding on September 13 after talks broke down with the unnamed party, understood to have been Lloyds TSB.

It also emerged this week that Northern Rock has borrowed a further £3bn from the Bank, taking the total now to around £16bn.

Analysts believe that the troubled lender could easily access at least another £5bn before the end of the year.

New Star economist Simon Ward – who has been examining the Bank’s weekly balance sheet closely over the last month – says that the weekly increase indicates that Northern Rock’s funding problems remain “acute”.

“There has been hopes that the rate of increase would slow following the Government’s announcement last week that its guarantee would be extended to new retail deposits”, Ward adds.

Northern Rock continues to reign in its mortgage lending with further changes to its sub-prime product range this week. In an alert to brokers it announced that a number of selected fixed rates have been removed from its niche prime to heavy adverse categories.

All of its sub-prime fixed rates have been increased by up to 0.55 per cent, while proc fees in its niche prime and light adverse have been reduced.

As the Northern Rock problems continue to rumble on, the mortgage market as a whole is having a tough time of it. The CML released its statistics on lending in September with the news that lending has fallen by as much as 12 per cent last month.

According to the CML, while lending typically falls between August and September, a 12 per cent decline is larger than the norm of around 5 per cent.

If there was any doubt at all before it is now clear as crystal the liquidity crunch has started to have a huge impact on the industry

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