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Northern Rock Wikipedia Entry

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On 13 September 2007, Northern Rock asked the Bank of England, as lender of last resort in the United Kingdom, for emergency funds due to problems in raising funds in the money market.[10] The problems arose from difficulties banks faced over the Summer 2007 in raising funds in the money markets, caused by the subprime crisis in the United States. The bank is solvent but has a liquidity problem because a large part of the bank's assets are held in mortgages, and are not accessible quickly.[11]

Previously Northern Rock had increased the interest rates on its own subprime loans.[12] With shares in Northern Rock plummeting by nearly a third, the British Government moved to reassure investors with the bank, with account holders urged not to worry about the bank going bust. The Treasury select committee chairman John McFall MP said: "I don't think customers of Northern Rock should be worried about their current accounts or mortgages."[13][14]

Northern Rock is not the only British bank to have called on the Bank of England for funds since the subprime crisis began.[15] However, the bank is more vulnerable to a credit crunch as its business model depends on funding from the wholesale credit markets, 75% of its funds coming from this source.[16] In his address to the Treasury Select Commitee, Bank of England governor Mervyn King had stated emergency funds would be made available to any British bank that needed it, but at a penalty rate, to ensure that lenders who had made bad lending decisions would suffer disadvantages to lenders who had made sensible lending decisions.[17]

On 14 September, the first day branches opened following the news, many customers queued outside branches to withdraw their savings (a run on the bank).[18] It was estimated that £1 billion was withdrawn by customers that day, about 5% of the total bank deposits held by the Northern Rock.[19]. In one incident, police were called to the branch in Cheltenham, Gloucestershire when two joint accountholders barricaded the bank manager in her office after she refused to let them withdraw £1 million from their account. Their money was held in an internet only account, which became inaccessible after the Northern Rock website crashed due to the volume of customers trying to log on[20]

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