Northern Rock's borrowing from Bank passes £10bn

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The Independent Online

Northern Rock has taken its borrowing from the Bank of England above £10bn, it emerged last night, with the bank hiring the American giant Citigroup to help find a market solution to its funding crisis.

The Bank of England's balance sheet published yesterday showed that "other assets" went up by £2.9bn from a week earlier. Those assets showed little variation each week before the Bank promised emergency funding to the mortgage lender but have now increased by £10.7bn since 12 September, with the additional assets widely assumed to be the loans offered to Northern Rock.

Northern Rock has hired Citigroup, the biggest US bank, to advise it alongside its long-time broker Merrill Lynch. It is understood Citigroup could use its balance sheet to give capital support to Northern Rock or a bidder for the bank. People close to the situation said recapitalising Northern Rock remained an alternative to a sale.

The Bank of England agreed to supply emergency funding to Northern Rock on 14 September after the freezing of the wholesale money markets cut off the bank's funding. The Treasury ultimately underwrites the Bank of England and was forced to guarantee existing deposits after mass withdrawals threatened Northern Rock with collapse.

The House of Commons' Treasury Committee is set to call Adam Applegarth, Northern Rock's chief executive, his chairman Matt Ridley and other board members to appear for questioning on 16 October. The bankers are only likely to be spared the grilling if the Prime Minister calls a general election and ends the current Parliament before that date.

Simon Ward, chief economist at New Star Asset Management, said the Bank of England's capital was £1.9bn at the end of February and arguably needs to be increased to support the emergency funding.

"If these figures are right, Northern Rock's loan is more than five times the Bank's capital, which would be seen as incautious if it were a bank in the private sector," Mr Ward said. "Obviously the Treasury stands behind the Bank of England but in terms of perception it would be better to have a larger cushion."

The stricken mortgage lender, the Treasury and their advisers are trying to arrange a takeover or another arrangement that will resolve the bank's future. The private investment firms JC Flowers and Cerberus are examining Northern Rock's books.

Northern Rock shares rose for the third day running yesterday, gaining 6.5 per cent to 162p as hopes of a takeover attracted speculative investors to the stock.