Select Committee on Treasury Written Evidence


  To complement the Chancellor's statement today to Parliament, this note sets out further details of the extension of the Government's guarantee arrangements put in place for deposits in Northern Rock plc during current instability in the financial markets and the terms of the Bank of England's additional facilities, announced on Tuesday 9 October 2007.


  At the request of Northern Rock, new guarantee arrangements were put in place from Tuesday to extend 100% cover to all new retail accounts opened with the company from the data of the original guarantee arrangements, 19 September, for as long as the current period of financial market instability lasts. As under the original arrangements, these extended guarantee arrangements will supplement, and not replace, any compensation provided by the Financial Services Compensation Scheme, which the Financial Services Authority has recently extended to cover 100% of the first £35000 of deposits.

  In order for this guarantee arrangement not to provide the company with a commercial advantage, a fee (from which the Treasury will benefit) has been attached to it, set at a higher rate than the interest premium on the additional facilities outlined below.


  Alongside the guarantee arrangements, the company has also requested that the Bank of England make additional facilities available to it. The company argued that additional facilities, on revised terms, would enable it to continue to pursue the full range of strategic options open to it.

  The company has confirmed that this process will be completed by February 2008, within the period of the additional facilities. The Authorities have made clear to the company that they will evaluate any proposal it puts forward against their objectives. In the case of the Treasury, and the Bank of England working with it, these objectives are to promote financial stability and the protection of consumers and taxpayers. The Financial Services Authority's objectives are set out in Part I of the Financial Services and Markets Act 2000. It will also be necessary to continue to be compliant with EC state aid rules.

  In order to meet these objectives, the Treasury, Bank of England and Financial Services Authority have agreed on the provision of additional facilities through the Bank of England. These facilities are uncommitted and are, therefore, not subject to any specific borrowing limit. They are repayable on demand and will incur a premium rate of interest. The interest premium will roll up and rank alongside the company's Tier II regulatory capital. The facilities are secured against all assets of the company but in view of the scale and nature of the new facilities, the Treasury has agreed to indemnify the Bank of England should the Bank of England face a deficit having previously made all reasonable endeavors to recover its claims on the company. The interest premium will therefore be passed to the Treasury.

  The Treasury has also indemnified the Bank of England against other liabilities that might arise from the Bank of England's role in the extended guarantee arrangements and additional facilities.

  The company has in turn indemnified the Bank of England and the Treasury in respect of the guarantee arrangements and certain costs and expenses, including our advisor costs. The company has also agreed to the usual range of lender protections typical for facilities of this nature.

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2008
Prepared 1 February 2008