Northern Rock remains on track to repay its borrowing from the Treasury / Bank of England by early next year, in line with the forecast made here. Net of deposits held at the Bank of England, the loan stood at £11.5 billion at end-September, down from £17.5 billion in June and £26.9 billion at end-2007. The £6.0 billion fall last quarter reflected ongoing mortgage redemptions together with retail inflows of £3.0 billion, with savers attracted by Rock's government guarantee and competitive savings rates (recently reduced).

The loan will be reduced by a further £3 billion when the Treasury converts part of the remaining debt into equity, as announced in August.

As argued previously, Northern Rock’s retreat from the mortgage market is exacerbating economic and financial stresses. Economy-wide net mortgage lending totalled £108 billion last year, of which Rock contributed £13 billion. This year net lending may fall to £40 billion, with Rock cutting outstanding loans by £20 billion. In other words, its U-turn accounts for about half of the fall in mortgage lending between 2007 and 2008.

The rapid liquidation of Northern Rock’s mortgage book, possibly to be followed by Bradford & Bingley’s, is clearly inconsistent with the government’s insistence that banks participating in its recapitalisation scheme maintain lending to homeowners and small businesses at 2007 levels.

Similarly, official exhortations to banks to increase their interbank lending sit uncomfortably with Rock’s hoarding of cash at the Bank of England. Deposits stood at £7.1 billion at the end of September, equivalent to 7-8% of assets. Other banks currently hold less than 2% of their assets in reserve balances with the Bank.