"Other assets" on the Bank of England’s balance sheet rose by a further £2.3 billion in the week to Wednesday 10th October, bringing the total increase since the run on Northern Rock started to £12.9 billion. This is the best available estimate of the extent of the Bank’s support to the troubled mortgage lender.

The weekly increase has slowed from £2.9 billion in the week to 3rd October and £4.9 billion in the prior week. However, the continuing erosion of Northern Rock’s funding base explains the Government’s decision this week to extend its guarantee to new retail deposits.

The Bank of England’s injection of funds into Northern Rock has contributed to an easing of money market conditions in recent weeks. The banking system's reserves at the Bank rose from £19.8 billion on Wednesday 12th September, just before the run on the mortgage bank, to £29.0 billion on 19th September and £29.2 billion on 26th September before falling back to £26.8 billion on 3rd October and £20.8 billion this week. Three-month interbank interest rates fell from 6.90% to 6.27% over the same period. Northern Rock has used the funds advanced by the Bank at a penalty rate to repay its retail depositors and other creditors. (A small portion will also have been needed to fund mortgage commitments.) Rather than stash cash under the mattress, these customers have mostly redeposited their savings with other banks and building societies, which have thereby enjoyed an infusion of liquidity without having to pay the Bank's penalty rate for emergency borrowing. This Northern Rock liquidity effect helps to explain why banks have spurned the Bank of England's offer to supply them with additional three-month funds based on looser collateral requirements but at an interest rate at least 1% above Bank rate. In effect, Northern Rock's shareholders have paid the penalty demanded by the Bank to supply the banking system as a whole with greater liquidity. More controversially, it could be argued that the current structure of incentives has created another form of "moral hazard": by refusing to lend to Northern Rock, other banks have forced the Bank to supply additional liquidity, which they have been able to access at non-penalty rates.