Northern Rock became the first high profile British victim last night of the crisis that has swept credit markets, after admitting that it has received a financial bail out from the Bank of England.
This is believed to be the first such rescue since the secondary banking crisis of the mid-Seventies. It is the largest banking debacle since the collapse of Barings in 1995.
Sources close to Northern Rock are keen to stress that the Newcastle-based mortgage bank had suffered a " liquidity" rather than a "solvency" crisis, and that depositors' funds were entirely safe. Nonetheless the fear must now be that Northern Rock may be the subject of an old fashioned run on the bank as worried customers withdraw money.
The Bank of England with the agreement of the Financial Services Authority and the Treasury is providing an emergency facility, at a penalty rate of interest. The Bank's move comes only two days after the Governor of the Bank of England, Mervyn King, declared "the provision of large liquidity facilities penalises those financial institutions that sat out the dance, encourages herd behaviour and increases the intensity of future crises".
However it is in line with the Governor's undertaking then that he would provide liquidity against good collateral. In this case the collateral offered is believed to be Northern Rock's mortgage book.
Of the main lenders in the UK mortgage market, Northern Rock seems peculiarly exposed to the wholesale money market to fund its business, rather than via retail savings gathered through branches and other channels. It has thus been more adversely affected than most by the seizing up of credit markets.
Indeed there have been indications of trouble to come ever since the bank issued an effective profits warning with its results at the end of June, at which point the shares fell by 10 per cent. They have been falling almost continuously ever since. It was the biggest loser in the FTSE 100 yesterday, closing down 4.9 per cent.
Even in the summer Northern Rock was forced to declare that it was suffering from a "structural mismatch between Libor [London inter-bank offered rate] and bank base rates". Since then Libor has risen much more than the Bank of England's base rate.
In the first six months of this year, Northern Rock made pre-tax profits of just under £300m, barely changed from the previous year.
However it hugely increased its share of the mortgage market, taking 18.9 per cent of all net mortgage lending against its previous peak of 14.5 per cent, in the second half of 2006. At that point, Adam Applegarth, the chief executive, said the mortgage market remained "robust" and that the group was continuing to trade strongly. Most of its book is mainstream, but it also originates subprime loans for Lehman Brothers. It is an important player in the market, with obvious signs it is having difficulty financing its activities.
Northern Rock has loans and other assets on its balance sheet of £113bn. The value of deposits placed with it by retail customers is £24bn. Formerly the Northern Rock Building Society, it demutualised in 1997.
Routinely spoken of recently as a takeover target, its best hope now may be that someone, possibly prompted by the Bank of England, now sees value in the ongoing business and brings Northern Rock's brief career as an independent quoted bank to a close.