Treasury extends Northern Rock guaranteeRecent accounts now covered
10 October 2007
Crisis-hit Northern Rock was granted fresh guarantees over savers' cash from the Treasury yesterday while the mortgage lender attempts to thrash out a rescue deal.
The Treasury has agreed to extend its 100% guarantee over the deposits of Northern Rock's customers to those savers who have opened accounts since September 19.
Northern Rock has agreed the deal while it pursues 'a full range of strategic options', which reportedly include a £10 billion loan from banking giant Citi or a potential private equity bid.
Northern Rock paid fee
Northern Rock is being charged an 'appropriate fee' for the extra protection to ensure that it does not gain a competitive advantage over other banks. Rivals can only guarantee the first £35,000 of customer savings.
The Newcastle-based group said the charge - as well as other costs for its advisers - would amount to between £40 million and £50 million this year.
Northern Rock was first forced to call on emergency funding from the Bank of England in September after soaring borrowing costs in money markets on which the company depends for its mortgage lending.
The news prompted queues of panicked savers in the first run on a UK bank for more than 150 years.
The arrangements for new savers will stay in place 'during the current instability in financial markets', while Northern Rock has also agreed additional borrowing facilities from the Bank of England.
Analysts have speculated that Northern Rock had borrowed nearly £11 billion from the Bank up to the middle of last week.
The analyst argued that the move would bring more 'clarity' to the lender's position and help it become less dependent on money markets - seen as the major flaw in its business model during the current financial uncertainty.
Future of Northern Rock
Northern Rock said that discussions continued with 'selected parties' after it revealed last month that it had received a number of approaches. The lender expects to conclude the review of its options by next February.
Reports last week said that New York-based private equity firm JC Flowers had raised £15 billion to bid for the bank. US private equity firm Blackstone is also rumoured to have shown interest.
Northern Rock said it had appointed banking groups Citi and Merrill Lynch to advise it on the range of options for the future of the company, as well as help with the discussions with interested parties.
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