Select Committee on Treasury Written Evidence

Memorandum from Northern Rock

  This memorandum responds to the Committee's requests at the evidence session on 16 October 2007.

1.  LIQUIDITY [Q492]

  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 squeezed.

  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 August—but 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 liquidity position.


(i)  Funding

  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 borrowings—comprising wholesale, Covered Bonds and Securitised Notes—grouped 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 shows—for the same three time snapshots—the actual amounts and percentages within each time duration.

  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 June 2007.

  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 H107.

  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 markets.

  In addition, Northern Rock sought to widen its funding diversity—raising 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.

Funding Insurance

  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.

(ii)  Lending

  Graph 2.6 shows our mortgage products—the 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 vintage points.

  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 431,189—equivalent 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

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