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Thousands of nervous customers queued outside troubled British bank Northern Rock's branches for a second day on Saturday, ignoring calls for calm from the Chancellor of the Exchequer, Alistair Darling, and the bank's management, and sparking fears of a full-blown "bank run".
On Friday (British time) Northern Rock got emergency funding from the Bank of England, the biggest bailout of a British lender in 30 years, after rising credit costs left the mortgage provider unable to make new loans.
Northern Rock shares plunged 31 per cent to a six-year low after the company said the central bank would provide an unspecified amount of credit.
The Newcastle-based bank, whose roots date back to 1850, is Britain's third-biggest lender by gross mortgages with loans valued at £17.4 billion ($49 billion) as of June 30.
The rescue stoked concern that other financial firms relying on short-term credit rather than deposits may be vulnerable because the rate they borrow at exceeds the amount they earn from lending.
Darling authorised the move, saying the Bank of England would step in as lender of last resort "where institutions face short-term liquidity difficulties".
Northern Rock chief executive Adam Applegarth said: "This is a set of circumstances that I've not seen in 25 years. It's a substantial programme, it is at a penalty rate. The facility will provide a solid ground base."
The Bank of England, Treasury and Financial Services Authority said in a joint statement: "Northern Rock is solvent, exceeds its regulatory capital requirement and has a good quality loan book."
The move to support it "reflects the difficulties that it has had in accessing longer-term funding and the mortgage securitisation market, on which Northern Rock is particularly reliant."
Northern Rock gets 73 per cent of its funding from wholesale markets rather than customer deposits, higher than its major rivals.
The Bank of England has not had to bankroll a British lender since the 1973 collapse of Cedar Holdings, a pioneer of second mortgages, triggered a crisis of confidence that threatened to unravel the banking system. That rescue cost about £3 billion, with the central bank providing about £100 million.
The central bank stepped in to help Northern Rock as commercial banks have become reluctant to lend to each other. At least 16 US lenders have been forced into bankruptcy since investors shunned adjustable-rate and sub-prime mortgages.
Germany's Landesbank Sachsen Girozentrale and IKB Deutsche Industriebank are getting emergency bailouts after losses from asset-backed securities.
Northern Rock's net lending surged 43 per cent in the first eight months of the year, "faster than its balance sheet could sustain".
-Observer, Bloomberg
