Britain has been forced to provide up to £3 billion of extra capital for state-owned Northern Rock as the housing market worsens. The move came as the bank reported a £585m first-half loss and soaring bad debts.
Northern Rock has seen the proportion of customers more than three months in arrears with their mortgage payments jump threefold as its customers face rising food and fuel prices and slumping house prices.
The British government said it would swap up to £3 billion of outstanding debt into shares in the bank after the transfer of a Bank of England loan to the Treasury. It will also strengthen Northern Rock's capital base by converting £400m of Treasury preference shares into ordinary shares.
Britain's chancellor Alistair Darling said this was the best way to support Northern Rock's financial stability, protect taxpayers and depositors, and comply with European rules.
Northern Rock was nationalised in February after its near-collapse five months earlier. It said it was ahead of its plan to repay its government loan, having cut the amount it borrowed from the Bank of England by £9.4 billion to £17.5 billion. It remains on course to repay the loan by the end of 2010.
Under the bank's business plan, unveiled after the government took control, Northern Rock had said it expected to be loss-making this year and not return to a profit until 2011.
The bank said its £585m loss was inflated by restructuring costs, including the cost of slashing its workforce, and a writedown of £70m on risky assets.
Northern Rock had warned of worsening bad debts earlier in 2008 and today said the trend had continued.
The share of its mortgages more than three months in arrears jumped to 1.18%, near the industry average, as the lender tightened its arrears policy and grappled with a deteriorating UK housing market. That compares to 0.45% at the end of December and 0.38% a year earlier.
