www.shaproperty.com

Sep 17, 2007

British lender's woes add to market worries

Customers withdraw $6b despite pledge by the Bank of England to provide emergency funds

London - WITHDRAWALS of £2 billion (S$6.1 billion) by panicking savers at Britain's No.5 mortgage provider are the latest sign that the worst is not over for the world's money markets.

The fall of Northern Rock last week confirmed fears that the global credit crunch can hit hard even without direct exposure to the United States sub- prime mortgage market - the epicentre of the liquidity squeeze.

And buy-now-pay-later economies like Britain's may well be extra vulnerable if the current crisis worsens.

'I think the UK is extremely vulnerable to this,' Mr Danny Gabay, director of consultants Fathom Financial Consulting told The Guardian newspaper.

'The UK has a double vulnerability. We are vulnerable because of our hugely over-extended consumer sector, and because of our large financial services sector.

'This is a financial market event; but the longer it goes on, the greater the risk that it becomes a real economy event - and I think we are at a tipping point.'

Fears of a run at Northern Rock remain even after the Bank of England (BOE) pledged to provide emergency funds last Friday. The move had come when the home loans specialist was unable to raise cash in money markets.

Northern Rock has become the first major British casualty of the global credit crunch, as it relies on wholesale markets for three-quarters of its funding needs.

Retail deposits, which had stood at £24 billion as at last Thursday, provided the remaining quarter of its funds. But if these are withdrawn, it will exacerbate the problem and increase the amount it needs to borrow from the BOE at a penalty interest rate.

Customers have withdrawn about £2 billion, or about 8 per cent of retail deposits, since last Friday, according to the British Broadcasting Corp.

Northern Rock declined to comment on the amount of withdrawals.

However, the bank urged customers not to panic and said it had not drawn on the BOE lending facility.

'It should be reassuring that the Bank of England is prepared to make this facility available,' a spokesman said. 'They would only have done it for someone that is well capitalised and solvent.'

But this and similar reassurances from the BOE and regulators were not heeded by thousands of the bank's 1.4 million savers and panic was evident as long queues formed at its 72 branches for a second day.

'I just can't take the risk of there suddenly being an announcement that...there's been another problem and they've closed the bank. I'm erring on the side of caution,' one customer told Sky News.

The bank's website and telephone services have had problems and many customers complained that they cannot access their accounts. Northern Rock said this was simply due to the high level of usage.

Branches were kept open late last Friday and many were kept open beyond normal Saturday morning hours.

A spokesman said the bank had prepared for withdrawals and expected to have enough cash available.

The funding turmoil and the threat that the run on deposits will gain momentum means it is likely to be taken over by a well-capitalised rival, many analysts predict.

REUTERS

Credit crunch claims first major UK victim

·  Panicky Northern Rock customers crowded into branches throughout the country and formed long queues outside as they waited to pull out their savings.

·  The bank says it had prepared for withdrawals and expects to have enough cash available.

·  The United Kingdom's fifth-largest mortgage provider is the nation's first major casualty of the global credit crunch, as it relies on wholesale markets for three-quarters of its funding needs.

·  Retail deposits, which had stood at £24 billion (S$73.2 billion), provided the rest of its funds.

·  The situation at Northern Rock confirms fears that the credit crunch can hit firms hard even if they do not have direct exposure to the United States sub-prime mortgage market.