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14 September 2007

Liquidity support facility for Northern

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Home > Newsroom & speeches > Press notices > 2007 Press Notices > September > Liquidity support facility for Northern Rock plc

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Rock plc
The Chancellor of the Exchequer has today authorised the Bank of England to provide a liquidity support facility to Northern Rock against
appropriate collateral and at an interest rate premium. This liquidity facility will be available to help Northern Rock to fund its operations
during the current period of turbulence in financial markets while Northern Rock works to secure an orderly resolution to its current liquidity
problems.
The decision to authorise was made by the Chancellor on the basis of recommendations by the Governor of the Bank of England and the
Chairman of the Financial Services Authority in accordance with the framework set out in the published Memorandum of Understanding
between the Bank, FSA and HM Treasury.

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The FSA judges that Northern Rock is solvent, exceeds its regulatory capital requirement and has a good quality loan book. The decision to
provide a liquidity support facility to Northern Rock reflects the difficulties that it has had in accessing longer term funding and the mortgage
securitisation market, on which Northern Rock is particularly reliant.

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In its role as lender of last resort, the Bank of England stands ready to make available facilities in comparable circumstances, where
institutions face short-term liquidity difficulties.

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1. The Memorandum of Understanding between HM Treasury, the Bank of England and the Financial Services Authority is
available here.

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2. The Governor of the Bank of England, in his letter to the Treasury Committee on 12 September 2007 said:
"Central banks, in their traditional lender of last resort (LOLR) role, can lend "against good collateral at a penalty rate" to an individual bank
facing temporary liquidity problems, but that is otherwise regarded as solvent. The rationale would be that the failure of such a bank would
lead to serious economic damage, including to the customers of the bank. The moral hazard of an increase in risk-taking resulting from the
provision of LOLR lending is reduced by making liquidity available only at a penalty rate. Such operations in this country are covered by the
tripartite arrangements set out in the MOU between the Treasury, Financial Services Authority and the Bank of England. Because they are
made to individual institutions, they are flexible with respect to type of collateral and term of the facility. LOLR operations remain in the
armoury of all central banks."

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3. Contact details for Press Offices:

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HM Treasury 020 7270 5238
Bank of England 020 7601 4411
Financial Services Authority 020 7066 3232

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4. Non-media enquiries should be addressed to the Treasury Correspondence and Enquiry Unit on 020 7270 4558, or by e-mail to
public.enquiries@hm-treasury.gov.uk
5. This press release and other Treasury publications and information are available on the Treasury website. If you would like Treasury
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