Northern Rock's £3bn bail-out

Updated 16.02 Tue Aug 05 2008

Keywords: northern rock

The Government has taken further steps to shore up Northern Rock after it announced losses of £585 million.

The Treasury will provide up to £3 billion of extra share capital for the recently-nationalised bank to help it cope with increased housing market uncertainty.

"We are repaying down the loan and at the end of the day the Government still anticipates that any of the amount transferred into equity will be recouped through the ultimate value of the bank" - Ron Sandler

The announcement came as Northern Rock reported a £585.4 million loss for the first half of this year amid soaring levels of customers defaulting on mortgage payments.

The capital will be made available in a debt-for-equity swap that will effectively see taxpayers become shareholders.

Executive chairman Ron Sandler said taxpayers would not be any more exposed to risk as a result.

He said: "We are repaying down the loan and at the end of the day the Government still anticipates that any of the amount transferred into equity will be recouped through the ultimate value of the bank."

Northern Rock saw the numbers of homes in its possession soar by two-thirds to 3,710 during the first half of this year, while bad debts more than trebled to £191.6 million.

But the lender managed to pay back £9.4 billion of Bank of England loans during the six months to leave £17.5 billion outstanding. Up to £3 billion of the outstanding debt will be swapped into shares under the capital scheme.

Northern Rock was nationalised after the Government failed to find a buyer for the business that provided "sufficient value for money to the taxpayer".

Shadow Treasury secretary Philip Hammond said: "Gordon Brown's regulatory regime failed to prevent the run on Northern Rock, and his subsequent dithering prevented a successful rescue.

"Now the taxpayer is being forced to hand over yet more money in order to keep this bank afloat."