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Treasury extends Rock guarantees Treasury doubles Rock guarantees
(about 2 hours later)
The Treasury has extended financial guarantees to Northern Rock at the request of the troubled lender.The Treasury has extended financial guarantees to Northern Rock at the request of the troubled lender.
It has offered to cover any loss by financial institutions which provide money to Northern Rock so the bank can operate normal banking services.It has offered to cover any loss by financial institutions which provide money to Northern Rock so the bank can operate normal banking services.
The Treasury has already guaranteed savers' deposits held at Northern Rock after September saw the UK's first run on a bank in living memory.The Treasury has already guaranteed savers' deposits held at Northern Rock after September saw the UK's first run on a bank in living memory.
The move could be seen as taking the bank a step closer to nationalisation. The effectively doubles the government's aid to more than £60bn.
Taxpayer liability Keeping it afloat
It will also lead to greater financial exposure for taxpayers, who have already lent Northern Rock an estimated £26bn. The Treasury made the move to ensure that the Northern Rock received enough funding from the money markets to survive into the New Year.
According to Mervyn King, the governor of the Bank of England, the additional guarantees amounts to 30% of the Northern Rock's balance sheet. But it means that each taxpayer has a £2000 exposure to the stricken bank.
The government's previously guarantees were worth £26bn.
According to Mervyn King, the governor of the Bank of England, the additional guarantees amounts to an additional 30% of the Northern Rock's balance sheet.
"This was a natural extension to help the company. What is important now is to find a new management to take the bank forward," Mr King said."This was a natural extension to help the company. What is important now is to find a new management to take the bank forward," Mr King said.
This is not very far in my view from actual nationalisation Robert Peston, BBC Business editor Read Robert's blogKing denies Treasury riftBank lends £10bn at auctionThis is not very far in my view from actual nationalisation Robert Peston, BBC Business editor Read Robert's blogKing denies Treasury riftBank lends £10bn at auction
The move could buy time for Northern Rock to find a private bidder willing to take it over.The move could buy time for Northern Rock to find a private bidder willing to take it over.
"What this means is that other financial institutions that have lent money to Northern Rock will now have their loans guaranteed," said BBC business editor Robert Peston."What this means is that other financial institutions that have lent money to Northern Rock will now have their loans guaranteed," said BBC business editor Robert Peston.
"Plainly Northern Rock feared that there would effectively be a meltdown if that they didn't get this guarantee," he added."Plainly Northern Rock feared that there would effectively be a meltdown if that they didn't get this guarantee," he added.
"This is not very far in my view from actual nationalisation.""This is not very far in my view from actual nationalisation."
The government would prefer a commercial solution for Northern Rock.The government would prefer a commercial solution for Northern Rock.
£100bn guarantee No buyers
An auction process has been thrown into doubt recently, though two high-profile suitors remain, including preferred bidder Virgin Group.An auction process has been thrown into doubt recently, though two high-profile suitors remain, including preferred bidder Virgin Group.
The Treasury's announcement means that most of Northern Rock's balance sheet is now covered by government guarantees.The Treasury's announcement means that most of Northern Rock's balance sheet is now covered by government guarantees.
This technically takes the gross exposure of the taxpayer to more than £100bn, the BBC's business editor said.
The Treasury said it would extend its existing agreement to cover the bank's wholesale obligations and borrowings to other financial institutions.The Treasury said it would extend its existing agreement to cover the bank's wholesale obligations and borrowings to other financial institutions.
It said the agreement related to agreements "existing or arising in the future".It said the agreement related to agreements "existing or arising in the future".
But it technically excludes the 40% of Northern Rock's assets that are held offshore in a special investment vehicle, or SIV, called Granite, based in Jersey.
Credit crunchCredit crunch
Northern Rock ran into difficulties during the recent credit crunch.Northern Rock ran into difficulties during the recent credit crunch.
Unlike most banks, which rely on savers' deposits to fund mortgages and other loans, Northern Rock borrowed heavily in credit markets.Unlike most banks, which rely on savers' deposits to fund mortgages and other loans, Northern Rock borrowed heavily in credit markets.
But banks become nervous about lending cash to each other amid fears over exposure to the US housing market slump.But banks become nervous about lending cash to each other amid fears over exposure to the US housing market slump.
This forced Northern Rock to seek emergency funding from the Bank of England in September, news which sent some customers rushing to withdraw their savings.This forced Northern Rock to seek emergency funding from the Bank of England in September, news which sent some customers rushing to withdraw their savings.