From the WSJ
In one of the highest-profile instances of a central bank coming directly to the rescue of a commercial bank in the current credit crisis, the Bank of England agreed to provide emergency funding to Northern Rock PLC, one of the United Kingdom's largest mortgage lenders.
...
The Bank of England's move -- the first time it has acted as a lender of last resort in this way since gaining independence on interest-rate policy in 1997 -- comes two days after its governor, Mervyn King, condemned some of the liquidity-providing measures other central banks have taken in the last month as needlessly encouraging risk-taking. In written testimony to the U.K. Parliament's Treasury Committee, Mr. King said the bank stood ready to take action in case of a severe shock to the banking system, but also warned that "if risk continues to be underpriced, the next period of turmoil will be on an even bigger scale."
From Bloomberg:
Northern Rock Plc got emergency funding from the Bank of England, the biggest bailout of a British lender in 30 years, after a freeze in money markets left the mortgage provider unable to finance itself.
Northern Rock shares plunged as much as 26 percent to a six- year low after the company said today the central bank will provide an unspecified amount of credit. The Newcastle, England- based bank is the U.K.'s third-biggest lender by gross mortgages with loans worth 17.4 billion pounds ($35 billion) as of June 30.
The rescue stoked concern among investors and depositors that other financial firms that rely on short-term credit rather than deposits may be vulnerable. The Chancellor of the Exchequer Alistair Darling authorized the move, saying the Bank of England will step in as the lender of last resort ``where institutions face short-term liquidity difficulties.''
``This is a set of circumstances that I've not seen in 25 years,'' Chief Executive Officer Adam Applegarth said on a call with journalists. ``It's a substantial program, it is at a penalty rate. The facility will provide a solid ground base.''
From the WSJ:
European markets fell Friday, after Northern Rock, one of the United Kingdom's largest mortgage lenders, said it has agreed with the Bank of England to raise liquidity as needed through either secured borrowings or repurchase facilities.
The news rehashed fears that the fallout from the recent subprime and liquidity crisis is far from over. "There are only two important questions in our mind," said analysts at Credit Suisse in London. "What is a base valuation for Rock? And what does it mean for other banks?" (See related article.)
Over the last month or so the ECB has injected a ton of liquidity into the credit markets. In public statements they have stated they will continue to do so. However, it appears the credit market tightening is starting to take its toll on the UK mortgage market.
As a result of this keep an eye on the following here in the US:
1.) XLF: the ETF for the financial sector.
2.) SHY: the ETF for the 1-3 year Treasury market
Also keep in mind the Countrywide Financial announced a big credit package yesterday. This could mitigate some of the effects of this development.
