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Rock's wholesale run

• Robert Peston
• 1 Nov 07, 03:30 PM

Figures published just now by the indicate that has to date borrowed around £23bn from it.

That is in effect a loan from all of us, since the is indemnifying the Bank of England for the entirety of the credit extended to the Rock.

What that means is that each of us as a British taxpayer is in effect lending £730 to the battered mortgage-provider.

It is a colossal sum.

So what's going on, given that the retail run on Northern Rock - when its depositors queued to withdraw their savings - ended on September 18?

Well, there has been a separate run, a wholesale run, involving much more money.

Famously and notoriously, three quarters of the Rock's funding came from wholesale markets, through the sale of bonds and other securities and from finance provided by banks and financial institutions.

As their loans to Northern Rock have fallen due for repayment over the past few weeks, these banks and financial institutions have been demanding their money back.

And the Rock has found it impossible to either roll over these loans or raise money from other commercial sources.

Why? Well most banks and financial institutions have been shunning any unnecessary risk, since the credit markets seized up in the summer.

So the Rock has had no option but to tap the emergency facility provided by the Bank of England – and on a colossal scale.

What does it mean?

Well, first of all the money provided by the Bank is not cheap - so paying the interest on it is making a big dent in the Rock's profits.

But the more worrying implication of the sheer magnitude of the wholesale run is that none of the three putative bidders for the Rock can possibly buy it without a cast-iron guarantee that the Government-backed loans will stay in place.

To be clear, the extent of public sector support goes beyond those direct loans. The Treasury has also indemnified a further £20bn odd of deposits.

So we are talking about total public-sector exposure to the Rock of £40bn - equivalent to around 3 per cent of our entire economy. And that exposure could become much bigger, as other loans to the Rock fall due for repayment.

The burden of responsibility this places on the new Chancellor, , is huge.

He has to prop the bank up, for fear of damaging confidence in the banking system.

But it will be unnerving for him that all this public money has been provided to a company whose senior management – still in place – was responsible for the crisis, in the way they chose to finance the bank in the first place.

It is an unpleasant choice for him. He can continue to provide arms-length loans to a bank whose executives he dare not try to influence, for fear of becoming even more responsible for Northern Rock’s ultimate fate as a shadow director.

Or he can replace management and admit he is running it as a shadow director.

Or he can nationalise the bank.

As for Northern Rock’s board, it’s a bit odd we haven’t heard from them on the impact all this expensive borrowing from the Bank is having on its profitability.

In the absence of any statement from them, we have to assume the directors believe the bank’s shares are worth their current price of 170p or £800m in aggregate – even though, as a matter of definition, the bank would not be a going concern without the Government prop.

UPDATE 19:45 How much will the Rock end up borrowing from the Bank of England? Well the Rock and the Bank of England are both expecting the amount borrowed from the emergency facility to rise to £30bn by the end of the year. How much more it rises after that will depend on the rate at which homeowners pay off their mortgages, but bankers tell me £30bn may not be the peak.

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