Northern Rock In Liquidity Emergency
by Stewart Douglas
Mortgage lender Northern Rock has today hit rock bottom as a result of over exposure to the sub-prime sector, which saw it pleading with central banks for emergency funding.
The UK based lender, one of the country’s biggest with a market share of almost 19%, was today involved in an emergency liquidity situation as a result of the degree of over exposure it has faced to the sub-prime crisis.
Despite the emergency package, experts are maintaining that Northern Rock is still not in any danger of going under. The lender still has more than sufficient assets, totalling £110 billion (around $220 billion).
The problem lies only in short term liquidity, which has proven a problem since markets tightened up over the early summer months in the wake of growing sub-prime unrest. Whilst year end profits will undoubtedly be affected, the lender remains solvent on paper over the long term for the time being.
Banks across the world were quick to invest heavily in the sizeable US sub-prime mortgage market with the prospect of strong yield returns from higher rates of interest.
However, as interest rates began to rise at the Federal Reserve, the number of defaults and repossessions skyrocketed, leaving banks short of lending stock and cash assets.
The rescue package, backed by both the Bank of England and the Chancellor Alistair Darling, comes just a day after Mervyn King of the Monetary Policy Committee emphasised he would not come to the rescue of any particular institution, counter to measures by the ECB and Federal Reserve.
As a result of the Bank of England’s emergency rescue package, shares in Northern Rock were down almost a third on the day, dragging down London trade overall which was as low as 89.30 points down by mid afternoon at 6274.6.
Additionally shares in HBOS, Alliance & Leicester and Barclays were also down in the wake of the liquidity crisis.
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