Northern Rock difficulties could result in banking chaos

Firms that borrow money on short-term deals to fund long-term assets such as mortgages are struggling to survive following the turbulence in the financial markets.

Borrowing rates at Interbank have escalated as financial organisations become wary of lending to each other. As customers queue outside Northern Rock branches to withdraw their funds, fears grow that the British banking system could be forced into crisis.

Shares in Northern Rock crashed 201p at close on Friday and the stock has lost well over 50% its value since its peak of 1251p in early 2007. Shares in its competitors such as Bradford & Bingley, Paragon, Alliance & Leicester and Halifax owner HBOS have also plunged.

Adam Applegarth, chief executive of Northern Rock, said profits for the year will be approximately £500 million compared with City forecasts of £647 million and well below last year’s £588 million.

The chief executive also commented that the turmoil in the financial markets in August is likely to persist for a little longer. There are severe conditions in global liquidity, which have affected world markets.

Adam Applegarth concluded that Northern Rock has taken careful action to restrain their lending until markets stabilise. He remarked that this is a global squeeze, it has to be hard for other banks too.

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