Memorandum from Northern Rock
This memorandum responds to the Committee's
requests at the evidence session on 16 October 2007.
Graph 1.1 shows Northern Rock's Total Liquidity
Ratio from 1 January 2007 until 13 September 2007. Although liquidity
was reduced, the total liquidity ratio was still 17% on 13 September
2007, but the cash element (the red coloured block) was being
Graph 1.2 shows the daily position on the combination
of cashflow and Sterling Stock Assets from the start of 2007 until
28 September 2007. The extra liquidity taken in July 2007 of £2.3
billion shows clearly. Also the inflow of funds from Granite securitisation
issues can be seen in January and in May. The May issue of £4.7
billion was overscribed by a factor of 2.2 times and was our third
cheapest ever deal, reinforcing our belief that the high quality
of assets and transparency of information would nevertheless give
Northern rock access to liquidity in tightening credit markets.
It can be seen that Northern Rock continued
to fund during Augustbut the duration came down mainly
to the very show overnight and one week categories instead of
the more usual mix of three month and over. Because of the shorter
duration, the Bank of England facility was sought. The retail
run that started on 13 Septrember when the news of the facility
leaked is clearly evidenced and is what seriously weakened the
2. FUNDING AND
Graph 2.1 shows three snapshots (at 31 December
2006, 30 June 2007 and 30 September 2007) of the maturity profile
of our non-retail borrowingscomprising wholesale, Covered
Bonds and Securitised Notesgrouped by time duration.
Graph 2.2 shows the same information, but with
the time duration for each time snapshot shown collected together.
Graph 2.3 showsfor the same three time
snapshotsthe actual amounts and percentages within each
In Graph 2.3, you can see in the 30 September
2007 picture, that the naticeable shortening in duration in all
the markets during August and September has pulled the 6-12 months
bracket down to £888 million from £3,032 million in
The average maturity of wholesale funding at
June 2007 was just over three years.
Profile of Funding
Northern Rock is not a significant outlier in
the size of wholesale funds as a percentage of Total Liabilities.
Graph 2.4 shows a number of institutions with a higher reliance,
as at 30 June 2007.
Northern Rock was not an outlier in the rate
of growth of its wholesale funds. Graph 2.5 shows growth in wholesale
funds as a percentage change in total non-equity funding during
It was envisaged that maintenance of high asset
quality and provision of transparency about credit would ensure
Northern Rock benefited from a flight to quality in tightening
In addition, Northern Rock sought to widen its
funding diversityraising retail deposits in Guernsey, Ireland
and Denmark as well as the UK. In securitisation, it raised funds
in UK, USA, Europe and Asia. For traditional wholesale funds,
in the last few years, we had added Medium Term Funding in USA,
Europe and Australia and shorter term funding from Europe, Canada,
USA and France to provide a diversified platform.
Northern Rock had a standy loan facility of
£750 million and a $775 million bilateral swingline facility
in place to support its US Commercial Paper programme making
a total of $2.3 million. This was proportionately slightly greater
cover than Countrywide in the US, given relative size of both
leading programmes and balance sheets, including securitisation.
In comparison, Countrywide in the US had a syndicated
loan facility of $11.5 billion. This is 5 times larger than Northern
Rock, but Countrywide's mortage book at the end of 2006 was over
7 times larger than Northern Rock's£650 billion compared
to £86 billion, including securitisations. (Countrywide's
new gross mortgage lending in 2006 was also over 7 times larger
than Northern Rock's£228 billion compared to £29
billion. Countrywide's new net lending was 6.7 times Northern
rock's£99 billion compared to £15 billion).
Importantly, Countrywide had the ability to
use its mortgate backed notes as collateral to borrow from the
US Federal Reserve on a general basis, under a general liquidity
facility available to all US banks, while Northern Rock was not
able to borrow in the UK on the same basis, nor indeed through
the ECB as it understands other UK banks with sizeable European
operations were able to do.
Graph 2.6 shows our mortgage productsthe
top graph is by number of accounts, the bottom one by value of
balance. The average remaining product life by number of accounts
is just over 30 months, and by balance is 28 months.
At the end of their existing product, a customer
can choose whether to take out a new product with Northern Rock,
or mover to a new lender.
The quality of Northern Rock's lending is high.
Accounts in arrears of three months of more were 0.47% at 30 June
2007, in comparison with the CML industry average of accounts
of three months in arrears of 1.06%.
Arrears from 2006 and 2007's lending by Northern
Rock are showing the benefit of enhanced credit scoring techniques
resulting from the requirements for the Basle II process and are
performing better than 2004 and 2005's lending judged at the same
3. Since 14 September 2007 there has been
no change to Northern Rock's governance arrangements, which remain
those set out in the Corporate Governance section of the annual
report and accounts 2006 (pages 13-17). [Q500]
However, both the original Sterling loan facility
granted by the Bank of England on 14 September 207 and the revised
facility, as amended and restated on 9 October 2007, and associated
documentation contain provisions requiring the Company to obtain
the Bank of England's consent and requiring the Company to provide
the Bank of England and other members of the Tripartite Authority
information relating to the Company and its business.
4. The proportion of the stock of mortgages
that were taken out by new customers in the last two years if
45% by number of accounts and 55% by value of balances. [Q685]
5. The number of shares owned outright by
the members of the Board is 431,189equivalent to 0.10%
of the shares of the company (including options this is 2,125,470,0.50%
of shares). Employees in the company own 3,570,012, equivalent
to 0.85% of the shares of the company (including options this
is 15,924,967,3.78% of shares). [Q708]
If you rquire any further information on these
points as stated in your letter dated 16 October, or on any other
matters raised by the Committee, please let me know.
1 November 2007