Northern Rock shares plummet

The shares plunged in value by 32 per cent overnight, after the Bank of England became 'lender of last resort', offering Northern Rock unlimited funding.

The turbulence currently being experienced in the wholesale markets has hit the lender hard and industry experts have voiced fears that it may end up going bust. However Northern Rock has stated that they currently remain solvent, although it admitted that its 2007 profits will inevitably take a hit.

Northern Rock’s chief executive, Adam J Applegarth, said: “We are seeing extreme conditions in global liquidity, which have impacted on world markets. As a result, we have taken prudent action to rein back our lending until markets normalise. Against that background it is inevitable, albeit disappointing, that our profits will be affected.

“We remain focused on prime lending in the UK mortgage market and our credit quality remains robust. The support of the Bank of England through this facility reflects a recognition that Northern Rock is solvent, exceeds its regulatory capital requirement and has a good quality loan book.

“In these extreme times we are pleased to have a high quality asset base and remain confident in the excellence of our strong customer franchise, our efficient business platform and our well-known brand."

Chancellor Alistair Darling, added: ""Northern Rock can draw on [the funding] when it requires, but it means it can carry on trading, people can use their accounts in the normal way, they carry on making their mortgage payments in the usual way, Northern Rock will be able to carry on its business."

Industry reaction

As the industry wakes up to a media frenzy surrounding Northern Rock’s financial plight, Michael Coogan, CML director general, commented: "Consumers need to understand that the problem for lenders generally at the moment is in raising funds, not in lending quality.

"All lenders are facing funding pressure at the moment, and what they need is a return to more normal market conditions as quickly as possible. We welcome the Bank's intervention and confirmation that it is keeping a close eye on the situation.

"Ultimately, the Bank of England would not have provided the loan to Northern Rock if it had concerns about the quality of the lender's own business.