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
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
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.