{"id":2565,"date":"2008-04-01T08:23:24","date_gmt":"2008-04-01T08:23:24","guid":{"rendered":"https:\/\/mmm.9dotdigital.ca\/?p=2565"},"modified":"2025-03-27T15:48:37","modified_gmt":"2025-03-27T15:48:37","slug":"comments-on-northern-rocks-annual-report-and-restructuring-plan","status":"publish","type":"post","link":"https:\/\/mmm.9dotdigital.ca\/?p=2565","title":{"rendered":"Comments on Northern Rock&#8217;s annual report and restructuring plan"},"content":{"rendered":"<ul>\n<li>Northern Rock&rsquo;s borrowing from the Bank of England stood at &pound;28.5 billion at the end of 2007, not &pound;26.9 billion as widely reported. The larger figure includes &pound;1.5 billion of funding obtained in the Bank of England&rsquo;s open market operations (OMO) &ndash; probably the auction of three-month funds against a wider definition of eligible collateral conducted on 18 December. <\/li>\n<\/ul>\n<ul>\n<li>Movements in &ldquo;other assets&rdquo; on the weekly Bank of England Return suggest direct borrowing increased further in the first few weeks of the year, when Northern Rock&rsquo;s future was in limbo. Rock may also have obtained additional OMO funding in a second auction of three-month funds on 15 January. So total support is likely to have peaked at about &pound;30 billion, as seemed <a href=\"http:\/\/www.moneymovesmarkets.com\/journal\/2007\/11\/22\/rock-loan-yet-to-peak.html\">likely<\/a>&nbsp;last autumn.<\/li>\n<\/ul>\n<ul>\n<li>Northern Rock&rsquo;s restructuring plan shows government funding &ndash; excluding OMO loans &ndash; falling to just &pound;1 billion by the end of 2009. This is consistent with the analysis <a href=\"http:\/\/www.moneymovesmarkets.com\/journal\/2008\/3\/11\/northern-rock-boe-payback-could-occur-sooner-than-expected.html\">here<\/a>, indicating borrowing might be repaid surprisingly quickly.<\/li>\n<\/ul>\n<ul>\n<li>The Treasury is more cautious than Northern Rock about the repayment schedule. The Chancellor has set a deadline of the end of 2010 for full repayment and the Budget projected direct support at &pound;14 billion at the end of the 2008\/9 financial year. This caution may reflect doubts that other banks will be able to accommodate mortgage borrowers switching from Rock given the current difficult funding environment. <\/li>\n<\/ul>\n<ul>\n<li>The ability of other lenders to assume Northern Rock&rsquo;s loans will depend partly on the nature and size of new longer-term financing facilities promised by the Bank of England to alleviate the funding crisis. The more generous the facilities, the more plausible Rock&rsquo;s forecasts of rapid repayment will look. <\/li>\n<\/ul>\n<ul>\n<li>The penalty rate being paid by Northern Rock on its non-OMO borrowing appears to be one percentage point above Bank Rate. Note 28 to Rock&rsquo;s accounts states that the margin above Bank Rate includes an &ldquo;element of fixed PIK interest margin&rdquo; (PIK = payment in kind, i.e. interest rolled up into a further debt). Note 34 gives a figure of &pound;40.9 million for this PIK interest at the end of 2007. This interest accrued over the final four months of 2007. Assuming borrowing averaged &pound;12 billion over this period, this would imply an annualised interest rate of about one percentage point ( 100 x ( 40.9 x 12 \/ 4 ) \/ 12000 ). <\/li>\n<\/ul>\n<ul>\n<li>The recent flow of cash back to Northern Rock, reflected in a fall in its Bank of England borrowing, has probably aggravated funding pressures faced by other banks, contributing to a rise in interbank interest rates. The Bank of England has cast doubt&nbsp;on such an effect, arguing that &ldquo;the impact on the money markets of any flows of cash back to the Bank of England from Northern Rock is routinely offset in the Bank&#8217;s weekly market operations.&rdquo; This may miss the point, however. Banks suffering an outflow because of Northern Rock are unlikely to regard the weekly repo facilities as a substitute. The form in which official funds are supplied to the market is an important influence on interbank interest rates. The Bank has replaced a longer-term loan against mortgage collateral with short-term lending against government securities. Banks are struggling to secure long-term funding at present so the substitution is likely to have contributed to upward pressure on term interbank rates. <\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>Northern Rock&rsquo;s borrowing from the Bank of England stood at &pound;28.5 billion at the end of 2007, not &pound;26.9 billion as widely reported. The larger figure includes &pound;1.5 billion of funding obtained in the Bank of England&rsquo;s open market operations (OMO) &ndash; probably the auction of three-month funds against a wider definition of eligible collateral [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3],"tags":[],"class_list":["post-2565","post","type-post","status-publish","format-standard","hentry","category-money-moves-markets"],"_links":{"self":[{"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/posts\/2565","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=2565"}],"version-history":[{"count":1,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/posts\/2565\/revisions"}],"predecessor-version":[{"id":4874,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/posts\/2565\/revisions\/4874"}],"wp:attachment":[{"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=2565"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=2565"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=2565"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}