  |
Credit Crisis Hits Lender in Britain
LONDON, Sept. 14 — Depositors of a big British mortgage lender, Northern Rock, rushed to withdraw money on Friday after the bank, unable to raise financing because of the tight credit market, turned to the Bank of England for an emergency loan.
Nervous investors also dumped Northern Rock shares, which fell 31 percent.
The bailout, analysts said, was the latest indication that the turmoil that began in the subprime market in the United States had expanded into other areas.
While other European banks have been hurt by investments in financial vehicles backed by subprime loans, Northern Rock said it had limited subprime exposure.
Instead, the bank ran into trouble because the tighter credit undermined its business model, which relied on financing mortgages by raising money in the capital markets, rather than depending on consumer deposits.
“The problems are potentially much wider now,” said Jonathan Loynes, an economist at Capital Economics, a consulting firm in London. “This means we have to worry about a wider range of institutions that aren’t directly involved in this credit crisis but are in a way innocent bystanders.”
The bailout came two days after the governor of the Bank of England, Mervyn King, warned that moves by other central banks, like the Federal Reserve and the European Central Bank, which have pumped additional liquidity into the system, could encourage “excessive risk-taking” by rewarding bad behavior.
The Bank of England emphasized Friday that Northern Rock would have to pay a premium to market interest rates for its emergency credit line, offered under the bank’s role as “lender of last resort.”
“Northern Rock is solvent, exceeds its regulatory capital requirement and has a good quality loan book,” the Bank of England, the Financial Services Authority and the Treasury said in a joint statement. But those words did not mollify some Northern Rock customers. Account holders lined up at many of the bank’s 70-plus branches, many of them reportedly withdrawing large sums.
Outside a branch in central London, Constance Hackford, a manager at an interior design company, weighed joining a line of about two dozen people. “I can’t imagine the Bank of England is going to let it fail — can they?” she said.
A spokesman for Northern Rock said Friday that the bank did not have any estimates yet of how much money had been withdrawn.
One reason Northern Rock customers may be nervous is that there is less protection for account holders in Britain than in the United States in case a bank fails. Deposits are insured up to £31,700, or about $64,000, compared with up to $100,000 in the United States.
Adam J. Applegarth, chief executive of Northern Rock, said account holders should not worry. “I’m a depositor with Northern Rock,” he said in a conference call. “Knowing that we have an uncapped facility with the Bank of England — you don’t get better than the Bank of England.” Because Northern Rock — and, perhaps, other British mortgage lenders — will have to pay more to raise money for loans, they will have to pass along higher rates to consumers, analysts say. That could cause a slowdown in lending, they added, which could act as a drag on the country’s housing market, which has soared over the last decade.
“Costs for first-time borrowers, already stretched in the affordability stakes, will rise substantially,” said Paul Mortimer-Lee, an economist at BNP Paribas. “First-time buyer activity seems pretty certain to show a sharp fall, which, since the whole market rests on the shoulders of the first-time buyer, is like throwing a spanner in the works of the whole market.”
There have been some signs of a slowdown. A survey released this week by the Royal Institute of Chartered Surveyors, a real estate group, showed that prices in August fell in more areas of Britain than they rose. Several banks have increased lending rates.
Mr. Applegarth said Northern Rock would cut back on issuing new loans, as well as cutting costs through a hiring freeze and other steps. The bank on Friday downgraded its profit outlook for this year and next year.
He said the bank, whose level of residential lending in the first eight months was 55 percent higher than a year earlier, had been more aggressive than some of its rivals in using “wholesale funding” rather than deposits to back its loans.
Northern Rock said it had £75 million ($152 million) in direct exposure to the subprime market, with £200 million ($405 million) in exposure to collateralized debt obligations, some of which is exposed to the subprime market.
Together, that represents less than one-quarter of 1 percent of the bank’s total assets, it said.
Northern Rock approached the central bank, Mr. Applegarth said, because of the “astonishing” conditions in the markets that it had used to raise financing, and because “we could see no end to this in the short term.”
Some analysts said Northern Rock could become a takeover target while others said the bank could emerge intact, assuming that credit problems ease.
While repossessions of homes have been rising in Britain, analysts said that Northern Rock has a generally sound mortgage portfolio. Fewer than one-half of 1 percent of the bank’s mortgage loans are more than three months in arrears, Northern Rock said; that is less than half the British industry average.
“We think there is a strong bank here, but with a vulnerability, which is its sources of funding,” said Matthew Taylor, an analyst at Fitch Ratings, which downgraded some of the bank’s credit ratings Friday.
No comments:
Post a Comment