The US sub-prime credit challenges have well and truly left the shores of the US and impacting on global maerkets. Here's an article of it's impact on one financial institution in the UK:
UK lending industry reeling after Northern Rock gets emergency loan
Tuesday, September 18, 2007
Eva Wiland, Lending Central
The lending industry here is reeling after UK’s fifth biggest mortgage lender Northern Rock had to go cap in hand to Bank of England, asking to be bailed out after falling victim to the foreign credit crisis.
The news sent shock waves through the European financial sector and put pressure on banking stocks in the UK and USA alike.
As the lender was forced to negotiate an emergency loan, thousands of anxious savers were lining up yesterday across the UK to withdraw their money while the value of Northern Rock shares dived by almost one-third.
Northern Rock, which is deeply rooted in the north-east of the UK, was traditional building society which became a big, aggressive lender.
Critics are questioning whether the company has been lending wisely, slamming the increasing propensity by many companies to lend far beyond normal, prudent levels, gambling on the UK housing boom.
They blame the crisis on those companies giving out mortgage loans recklessly and forewarn that from now on, there will be fewer cheaper mortgages.
With relatively few savers, Northern Rock had been relying on raising three-quarters of its funds on the money markets.
However, this came to an end as UK banks stopped lending each other money following the sub-prime crisis in the US.
The problems of Northern Rock are the manifestation of a lender of last resort culture, forcing consumers to dig themselves deeper into debt, attracted by offers of easy credit cards, easy loans, or consolidation of loans, already difficulty to repay.
The crisis prompted the British Chancellor, Alistair Darling, to call for an end to the era of “free and easy lending by the banks”.
He was forced to warn that the credit boom was blowing out beyond sensible limits, calling on lenders to return to “good old-fashioned banking”.
“They need to know who they are lending to, how much they are lending and what the risk is,” he said.
Concern has been mounting at the British Treasury and Bank of England as they enter the northern autumn when thousands of fixed home loans will expire, that borrowers may be exposed to the brunt of the country’s latest interest rates.
The US sub-prime mortgage industry and concern over UK consumers over-extending themselves are putting further pressure on the market.
It is now increasingly evident the global liquidity crisis is starting to make an impact on consumer behaviour in the UK.
John Lewis, UK’s biggest department store, warned today of a sharp slowdown on the high street, as it was preparing itself for consumers to curb their spending with the result of much weaker trading in the run-up to Christmas.
UK retail sales in the second half of 2007 are reported to be more subdued than earlier in the year and many weaker retailers could be facing difficult times ahead.
Next, one of UK’s most successful fashion retailers, warned the credit crunch and higher interest rates could affect Christmas trading and French Connection, another successful fashion retailer, have reported sliding sales.
Most of the Northern Rock savers have heard assurances from Bank of England and Northern Rock alike that the lender is solvent, but many just don’t believe them.
Neil Collins, financial commentator on the UK Evening Standard newspaper likened the credit crisis to a tropical storm which would “sweep right through the financial system within 90 days”.
Although the damage might be small to Northern Rock, he warns the crisis is likely to carry away some of the more obscure lenders, causing structural damage if dearer mortgages cause house prices to fall significantly
Comments