LONDON — Uneasy customers formed lines outside Britain's fifth-largest mortgage lender Friday after it had to ask the Bank of England for emergency funding because it had been hit hard by the credit crunch tied to the U.S. sub-prime mortgage crisis.
The emergency loan for Northern Rock was the first such action by the central bank since the 1970s, and it came after the northern England bank said it couldn't arrange short-term loans from other financial institutions amid the international money-market squeeze.
Treasury Chancellor Alistair Darling said the move was an attempt to restore stability to a fiscally responsible mortgage lender caught up in a U.S.-generated crisis, and did not bode ill for Britain's banking system as a whole.
"The problem here is that there is a lot of money in the system. The banks have got money, but they're reluctant to lend it to each other at the moment because of the problems in America," Darling told the BBC. "So when you get a situation like that, in order to create a stable banking system, the Bank of England steps in. . . . Northern Rock will be able to carry on its business."
Analysts said the bank, which has $226 billion in assets and $48.7 billion in deposits, was not in danger of failure but could become ripe for takeover with a continuing decline in its stock price, which plummeted more than 30% on Friday.
Northern Rock's woes were a drag on the British banking sector. Alliance & Leicester, a commercial and consumer bank, fell 6.9%, HBOS, the nation's largest mortgage lender, lost 3.6%, and Paragon Group Cos., a lender to landlords, tumbled 17%.
Northern Rock has very little involvement in the sub-prime mortgages that got U.S. lenders into trouble, with the bulk of its business in prime mortgages.
It ran into trouble because of its aggressive involvement in the wholesale market for funding its loans. When markets dried up in recent weeks, it was left without access to cash.
"It's a typical example of what happens if you have all your eggs in one basket," said Justin Urquhart Stewart of London-based Seven Investment Management.
"Northern Rock is pretty uniquely exposed in that it's only a mortgage bank. It doesn't do other things banks do; it just does mortgages very well. Their mortgages are very competitive because they used money markets to get rates down," he said. "But as a result of what happened in the sub-prime market, mortgage banks like Northern Rock have no access to liquidity, and liquidity is the lifeblood of capitalism. If you haven't got any blood, you shrivel up and die."
