The penal rate of interest that the Bank of England is charging Northern Rock for emergency funding is likely to plunge the mortgage bank into losses this year, according to one of its leading shareholders.
RAB Capital, the hedge fund group that has built up a 6.6 per cent stake in Rock, has called for the Bank to change the way it responds to crises, warning that the current system gave Rock little hope of a viable future.
RAB said the Bank could give Rock a fighting chance of survival by following the lead of the US Federal Reserve, which charges a penalty interest rate of 0.5 percentage points above its base lending rate for emergency funding, and by making it clear the facility would be maintained for long enough to avoid the bank being forced to sell off assets at bargain prices.
Both Northern Rock and the Bank of England have refused to reveal the rate the bank is paying for funding, though it is thought to be at least 1 percentage point above base rate.
RAB is understood to have calculated that even if Northern Rock were to be offered a penalty rate of 0.5 percentage points above base rate on its borrowing from the Bank – thought to total £8bn – more than half its profits this year would be wiped out.
The warning came yesterday as the Treasury refused to provide further detail on the guarantee the Government has offered savers with deposits at Rock. It remains unclear whether the guarantee would be maintained in the event of the bank being taken over.
The Treasury has previously promised the guarantee would "remain in place during the current instability in the financial markets", but a spokesman said yesterday that he was unable to comment on whether the pledge would be transferred in the event of savers' accounts switching to another institution following a takeover.
While the Government is keen to avoid an open-ended commitment to Rock savers, the issue could become a stumbling block for potential buyers of the bank, which will also be expected to take on its sizeable liabilities.Reuse content