Housing threat to Rock repayments

By Nils Blythe
BBC News, business correspondent

Northern Rock was nationalised in February after getting into trouble

Sharp falls in UK house prices could delay Northern Rock's repayment of billions of pounds of loans from the taxpayer, the bank's chairman has said.

However, Ron Sandler told MPs that, as things currently stand, Northern Rock will be able to repay the £26.9bn Bank of England loan by the end of 2010.

The bank expects to repay about £7bn of the loan by the end of 2008, he said.

Northern Rock was nationalised in February after the credit crisis forced it to seek emergency funds.

'Considerable strain'

Mr Sandler told the Treasury Select Committee that the bank's recovery plan was "challenging in very many respects".

"If we were to suffer a significant downturn in this economy, and if that were to lead to levels of unemployment which are significantly higher than those at present I can see that that would place considerable strain on the ability of the company to deliver the plan," Mr Sandler said.

He assured MPs that his plan for Northern Rock had been "stress tested" against problems in the housing market such as those seen in Britain during the early 1990s.

But he admitted that "if house prices were to decline seriously - five, 10, or 15% - then it certainly would put a great deal of stress on our ability to deliver the plan".

Several economic forecasters have predicted house price falls in the UK.

Capital Economics has said that it expects house prices to fall by 20% by the end of 2009.

Mr Sandler also told MPs that once the government loans had been repaid, the taxpayer would "still be exposed" for some time, as it took longer for government guarantees to be released.

Outside interests

The Newcastle-based bank had primarily relied on borrowing from money markets, rather than its own deposits, to fund mortgage lending. As the credit squeeze took hold it struggled to finance its business model.

The move to seek emergency funding from the Bank of England triggered the first run on a UK bank in more than a century.

Northern Rock is now trying to build up its deposits from savers - while shedding some of its mortgage book.

Mr Sandler told the MPs that his aim was a mortgage loan book of about £50bn, with approximately half of the money supplied by customers' savings and the rest made up from the financial markets.

As it reduces its lending the bank will require less staff and it is planning to cut 2,000 jobs as part of a restructuring plan. However, Mr Sandler told MPs that it would continue its sponsorship of Newcastle United Football Club and Newcastle Falcons rugby team for commercial reasons.

It will also pay £15m per year for the next three years to a charitable foundation set up when Northern Rock converted from being a mutually owned building society into a bank.