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Rock - the numbers

• Robert Peston
• 15 Sep 07, 10:17 AM

Northern Rock’s depositors are nervous. That’s quite understandable. Some £1bn was withdrawn by customers yesterday, much of it from bank branches.

That represents a big chunk of the £5.6bn held in what Northern Rock calls branch accounts (as of the bank’s June 30 balance sheet).

There is a further £9.9bn in postal accounts – and presumably Northern Rock will be learning from today’s mailbag the scale of withdrawals from these accounts.

Then there is £4bn in internet accounts.

Holders of these have been anxiously emailing me saying that it has been almost impossible to log-on to their savings accounts over the past 24 hours, so – again – it is unclear what scale of transfer there has yet been out of these.

But just how worried should Northern Rock’s depositors actually be?

Well there are a number of different ways of answering that.

I am going to start by looking at the support the Bank of England has promised to provide and seeing whether it would be enough to pay out every single depositor, in the unlikely worst case that they all decided to withdraw their cash.

This is not as straightforward as you might expect, because the Bank has given only limited details of the emergency lending facility it is providing.

What I have learned is that the bank is lending against the collateral of mortgages made by Northern Rock.

However, it is not prepared to lend Northern Rock £1 for every £1 of mortgage pledged to it as security.

My understanding is that it wants more than £105p of collateral for each £1 it lends.

Now, Northern Rock’s balance sheet of June 30 this year shows that it has £31bn of residential property loans not subject to securitisation – which in theory are available to be pledged to the Bank.

But a further note to the accounts shows that £10.2bn of these have already been pledged, to providers of funds via financial instruments called covered bonds.

So there’s only £21bn of these straightforward mortgages available to the Rock as possible security for loans from the Bank of England. At a 5 per cent discount, the Bank would probably lend just under £20bn against these.

That’s not very encouraging, because retail deposits – which include the branch deposits, internet accounts and so on that I have already mentioned – actually total £24bn.

Also, there is a further £5.8bn described as “other customer accounts”. And there are “deposits by banks” of £3.7bn.

So total deposits are nudging £34bn – which on the face of it is a bit more than assets that could in effect be swapped for hard cash at the Bank of England.

So does the Rock have other assets it could pledge? Well it has £6bn of residential buy-to-let loans not subject to securitisation and therefore useable as collateral.

And it has £7.8bn of unsecured loans also not subject to securitisation.

Buy-to-let loans and unsecured loans are always seen as lower quality than residential mortgages. So if the Bank is prepared to accept them as security at all, it would probably demand a much greater discount to asset-value than 5 per cent when lending against these.

So I am going to make the heroic assumption that Northern Rock could probably borrower a further £11bn or so against its buy-to-let and unsecured book.

That gives us a running total of something like £30bn that could be obtained from the Bank, if all this stuff was pledged to it. Which is still not enough to pay out every single depositor in the highly unlikely meltdown case.

Now its June 30 balance sheet also shows that it has other higher quality assets – but in the past few weeks some of these will have been liquidated or pledged as Northern Rock endeavoured to weather the financial turmoil and looked for ways to finance its lending.

But for what its worth, as of June 30 Northern Rock had securities “available for sale” totalling £8bn and loans to other banks of just under £7bn.

Bottom line is that I estimate that Northern Rock has just about sufficient free assets to raise funds in the extreme and very unlikely case that every single one of its depositors wanted its money back.

Which helps to explain why the Financial Services Authority has described Northern Rock as solvent.

But on the basis at which the Bank of England is prepared to lend, depositors’ funds seem to be only just about covered by loans that could be provided by the Bank.

That said, there is a bigger political reason why Northern Rock may well now be one of the safest banks in the world.

Here the important point is that the Financial Services Authority has declared Northern Rock to be basically sound, the victim of temporary and exceptional maket conditions.

And the Chancellor, Alistair Darling, has very publicly endorsed the FSA’s analysis and said there is no reason for Northern Rock’s depositors to panic.

So in the unlikely event that a black hole did emerge at Northern Rock, the Government would be under enormous moral pressure to pay out 100 pence in the pound to Northern’s retail depositors, as opposed to the less generous terms available under the official deposit protection scheme.

UPDATE SEPT 15 16:00 It turns out that withdrawals from the website represented the biggest flight out of Northern Rock on Friday, in spite of the technical problems experienced by many holders of online accounts. Which is predictable, in that it is so much less hassle to go online than to queue outside (so long as you are actually able to log on). In an age when funds can be transferred with the click of a mouse, it is even harder for a bank to hang on to funds after any kind of knock to its reputation.

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