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Document Type

Case Study

Case Series

Ad hoc Emergency Liquidity Programs

Abstract

Northern Rock plc was a bank in the United Kingdom (UK) that experienced rapid growth from 1998 to 2007. The bank was a large issuer of UK residential mortgage-backed securities. Its funding was primarily wholesale as its retail deposit growth had not kept up with its asset growth. By August 2007, Northern Rock’s credit default swap spreads were widening and its share price falling as conditions deteriorated in the markets on which it relied for short-term funding. To meet the bank’s substantial liquidity needs, the Bank of England (BoE) announced on September 14, 2007, that it would extend an emergency liquidity facility to Northern Rock “against appropriate collateral and at an interest rate premium,” without providing further details. The announcement of the facility and the rumors in the days before led to a deposit run and prompted Her Majesty’s Treasury (HM Treasury) to extend various guarantees to Northern Rock. Northern Rock drew on the BoE’s liquidity facilities almost immediately as depositors withdrew 4.6 billion pounds sterling (GBP) within days. Northern Rock reported outstanding emergency lending of GBP 28.5 billion at the end of December 2007. In February 2008, HM Treasury took over Northern Rock. In August 2008, HM Treasury assumed from the BoE the remaining emergency loan to Northern Rock, which had fallen to GBP 14.5 billion. In 2010, the government split Northern Rock into good and bad banks, Northern Rock plc and Northern Rock Asset Management plc, respectively. The government sold the good bank to Virgin Money in January 2012 for GBP 747 million. In 2016, the National Audit Office estimated a net gain of GBP 5 billion to the government after the intervention in Northern Rock, although not on a net present value basis.

Date Revised

2025-04-15

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