Northern Rock crisis hits shares

Spooked Northern Rock customers spent Friday queuing outside branches after the mortgage lender confirmed it had been bailed out by the Bank of England.

And shares fell 32 per cent in Friday trading as a result of the ongoing uncertainty.

Chief executive Adam Applegarth said the emergency funding - a result of the worldwide credit crunch - was as yet untouched.

And he denied that customers' accounts had been frozen, adding that it is "business as normal" for the Newcastle-based firm.

The lender holds deposits of £24 billion from 1.5 million savers and lends to 800,000 homeowners.

The BoE, seen as the "lender of last resort", is likely to charge the lender a higher rate of interest, and in turn Northern Rock warned that 2007 profits will be up to £147 million lower than expected.

Chancellor Alistair Darling said: "The problem here is that there is a lot of money in the system, banks have got money but they are reluctant to lend it to each other because of the problems in America."

He added: "So when you get a situation like that, in order to create a stable banking system, the Bank of England steps in, it makes facilities available to Northern Rock.

"Northern Rock can draw on them as and when it requires but it means that it can carry on trading.

"People can use their accounts in the usual way, they can carry on making their mortgage payments in the usual way. Northern Rock will be able to carry on its business.

"That is precisely the right action to take when you are faced with the sort of problems that we have just now."

It is the first time in many years that the BoE has been called upon in such a way, although Barclays was forced to borrow emergency funding due to a "technical breakdown" in the UK clearing system last month.

Ray Boulger, senior technical manager at mortgage broker John Charcol, said: "It is unusual. Banks will try to arrange things so they do not go to the lender of last resort.

"Clearly Northern Rock has had difficulties raising money from their usual sources."

There has been widespread volatility in international financial markets in the past month, following the US sub-prime mortgage crisis.

Record home loan defaults in America among borrowers with poor credit ratings followed a slowing of the housing market and a slump in property prices.

Billions of pounds have been wiped off the value of shares in companies around the world and banks have cut back on their lending to each other.

The UK sub-prime market covers a tenth of mortgage borrowers, although it is much smaller than the US and much more tightly regulated.

However, on Thursday, a £4.4 billion relief fund was drained by major banks in less than an hour after the BoE pumped in the extra cash to ease the pain felt from soaring inter-bank borrowing rates.

Additionally, Halifax, which accounts for one in every five mortgages in the UK, said it was increasing the rate charged on 20 of its tracker mortgages for new customers by between 0.1 per cent and 0.2 per cent.

It followed a move by Abbey, the UK's second biggest lender, which said it was increasing its tracker mortgage rates by the same amount for new customers.

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