January 23, 2009 / 1:03 AM / 10 years ago

Government may inject billions into Northern Rock

LONDON (Reuters) - The government is considering injecting as much as 10 billion pounds into Northern Rock to use the nationalised bank to ramp up mortgage lending, the Daily Telegraph reported.

Buildings are reflected in the windows of Northern Rock's Leicester branch, central England in this February 4, 2008 file photograph. REUTERS/Darren Staples/Files

The Treasury has yet to make a final decision on the plan, which may also see the bank hiring new staff, the newspaper reported in its Friday edition.

Spokesmen for the Treasury and Northern Rock, which is due to unveil a new business plan in the next few weeks, could not immediately be reached for comment.

Northern Rock became the first British casualty of the credit crunch in September 2007 when the bank, heavily dependent on wholesale markets for its funding, revealed that it had been forced to seek emergency support from the Bank of England.

The bank was nationalised in early 2008 after attempts to find a private sector buyer fell through.

Since then, Northern Rock has been shrinking its mortgage book and focussing on repaying a government loan.

But the bank said on Monday it was slowing its rate of mortgage redemptions to support the government’s policy of increasing mortgage lending. The announcement coincided with a second bank rescue package announced by Prime Minister Gordon Brown’s government.

Standard & Poor’s Ratings Services said on Monday that a likely consequence of this decision was that Northern Rock would need more capital than the 3 billion pound equity injection previously proposed by the government.

Banks hit by the credit crunch have cut back borrowing to businesses and households, a trend the government is desperate to reverse to avoid a recession deepening into a slump.

The injection into Northern Rock was likely to be in the form of equity and a new loan, the Daily Telegraph said. It will include the 3 billion pounds the government has already earmarked to be converted from part of its loan to the bank into equity, it said.

About 5 billion pounds of new equity could give Northern Rock the firepower to do about 50 billion pounds of new lending, providing the capital is not eroded by bad debts, it said.

Treasury officials have been liaising with Brussels as they need a waiver from European Union state aid rules, the newspaper said.

It said there had been no final decision on the plan and officials have not ruled out a more limited approach of just swapping the 3 billion pounds of debt for equity.

Reporting by Adrian Croft; Editing by Andre Grenon

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