Northern Rock could repay loan within a year

12 March 2008 / by Rachael Stiles
Northern Rock could repay its loan from the Bank of England within 12 months, according to analysis from New Star economist Simon Ward.

Using funds from Granite – Northern Rock's offshore securitisation vehicle – and its non-Granite mortgages, Mr Ward believes that the bank could scrape together £13 billion from repaid loans, when borrowers find that they are offered highly unattractive refinancing deals when their fixed rate mortgage deals come to an end, in an effort to downsize the business. According to Mr Ward, "there would seem to be no obstacle" in extracting the necessary funds.

Furthermore, Northern Rock retained about half of its £24 billion in retail savings deposits last year when there was a run on the bank, and many savers are returning post-nationalisation as a result of a Government guarantee and competitive interest rates which are attracting new custom. Repaying the £25 billion loan could be a reality by "early next year", Mr Ward said.

There are, however, a few potential snags in this perfect plan. One is that borrowers will be unable to find another lender in this financially rocky climate, and be forced to stay on with Northern Rock. Also, competing providers of savings accounts might accuse them of unfair competition, forcing the Rock to cut its deposit rates, and therefore attracting fewer new customers.

There is also the possibility that Northern Rock will decide not to repay the Bank of England so soon, opting instead to use the money for financing new mortgage business and maximising its attractiveness to eventual buyers of the bank.

To start the ball rolling for driving away business, Northern Rock announced this week that it will no longer be offering sub-prime mortgages, setting the new rates at uncompetitive levels. It is believed that similar measures will be announced shortly, including job losses and a massive reduction of the bank's £100 billion mortgage book.

This week, the Northern Rock fiasco claimed five more victims in the form of the resignation of five members of the Financial Services Authority who are thought to have been involved in the 'regulation' of Northern Rock as it went under, The Times has found. The FSA is responsible for ensuring that Britain's banks have sufficient liquidity, and has come under fire for failing to spot the fatal flaw in Northern Rock's business plan. This is the first time that a regulator has resigned publicly over the debacle.

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