Britain will inject billions of pounds into state-owned Northern Rock bank to try to unlock lending and help the economy emerge from recession, Chancellor Alistair Darling said on Monday.
The plan to get Northern Rock lending again forms part of a package expected this week designed to get credit flowing again after the economy shrank by 1.5% in the last three months of 2008.
House prices have slumped by nearly 20% in the last year as mortgage lending has all but dried up in the face of a global credit crunch that has put so many of the world’s major economies into recession.
“It is best to look at this as one of a series of measures we are taking to try and rebuild the banking system for the future,” Darling told BBC radio. “I want to ensure that when we come into the recovery phase, the money is there for businesses, the money is there for people who want to buy homes.”
The bank would fill the gap left by the withdrawal of lending from foreign banks, he added. However, Northern Rock will not return to its aggressive lending policies that saw home-buyers offered loans well above the value of their house.
“I really have severe doubts about the 100%-plus loans that were made available. That is ridiculous,” he said. “Most of the mortgages will be at a sensible mortgage. Northern Rock aren’t going to do 100%. They can go up to 90.”
A Treasury official said Northern Rock would increase its home loans by up to £14 billion over the next two years. Despite record-low interest rates, banks have cut lending as they try to rebuild their capital base and avoid unnecessary risk.
Northern Rock was nationalized last year, becoming one of the first victims of the credit squeeze, when news that it had to seek emergency funding from the Bank of England triggered Britain’s first bank run in more than a century.
Conservative Party finance spokesman George Osborne said it was a “huge U-turn” to increase home loans at Northern Rock after the government’s initial decision to cut the number of mortgages on its books.
“I don’t think the government had many options because other policies have completely failed,” he told BBC radio. “It was rather bizarre to have Northern Rock continuing to deleverage, to wind down its mortgage book, while other policies to restart the housing market were clearly failing.”
Northern Rock’s business plan submitted to the European Commission at the time of its nationalization required it to reduce its balance sheet and borrowing from the government.
The Treasury official said that plan was now well ahead of schedule with the government loan standing at around £9 billion ($13.1 billion) at the end of December 2008, down from £27 billion a year earlier. (Reuters)