Government boosts Northern Rock capital after loss

By Steve Slater and Clara Ferreira-Marques

LONDON (Reuters) - The government has been forced to provide up to 3 billion pounds of extra capital for state-owned Northern Rock as the housing market worsens and the bank reported a 585 million pound loss and soaring bad debts.

Northern Rock, the most aggressive mortgage lender until its funding crisis last year, has seen the proportion of customers more than three months in arrears with their mortgage payments jump threefold as people face rising food and fuel prices and slumping house prices.

The government said on Tuesday it would swap up to 3 billion pounds of outstanding debt into equity after the transfer of a Bank of England loan to the Treasury.

It will also strengthen Northern Rock's capital base by converting 400 million pounds of Treasury preference shares into ordinary shares.

Chancellor Alistair Darling said this was the best way to support Northern Rock's financial stability, protect taxpayers and depositors, and comply with European rules.

"We are being prudent," Northern Rock Executive Chairman Ron Sandler told reporters on a conference call.

"You need to bear in mind that the (EU) state aid rules do not allow for a drip-feed of capital into the bank. We have selected an amount that we believe is comfortable for the whole period of temporary public ownership."

He said any surplus could be returned to the government.