There are four main options facing Northern Rock – none of them attractive to small shareholders, nor to the Government. The bank’s future must be decided by February, when the emergency funding will be reviewed.

Put the bank into receivership

A creditor can call in a receiver if a debtor breaches the conditions of a loan. The Bank of England is Northern Rock’s senior secured creditor, which means that it has first call on any assets, should the bank default on its loan. The precise terms of the Government’s loan to Northern Rock, and how they might be breached, have never been spelt out. But the Chancellor made clear yesterday that the Treasury was playing a big part in deciding the bank’s future. It could, in theory, order the bank into receivership but is unlikely to do so because of the unattractive political ramifications such as the thousands of jobs lost and the outrage of small shareholders who would receive nothing in a liquidation. It would also call into question the Chancellor’s original decision to prop up the bank with emergency funding.

The liquidation of a bank can take years, particularly since there is no current market for some of Northern Rock’s assets.

Sell all or part of the bank

Northern Rock said yesterday that it had received expressions of interest from companies or consortiums that might like to buy all or part of the bank. So far none is thought to have offered to buy the whole bank. This is in part because bidders have had difficulty valuing the bank, because of the volatility of its share price and uncertainty about the banking environment next year, and also because bidders have struggled to raise money to fund the purchase.

Northern Rock said yesterday that the offers it had received so far had undervalued the company, but that it expected more bids to come in this week.

There is a chance that Northern Rock could secure sufficient funding from other banks to remain as a stand-alone company. Although this option has not been discounted, it looks unlikely.

Nationalise the bank

This is not a simple option because Northern Rock has not gone bust. The Government could make an offer for all the outstanding shares in Northern Rock in order to turn it into a state-controlled company, but that could result in litigation from shareholders over the correct price for their shares. The present Government has no previous experience in nationalising a bank. But it has nationalised other companies, most recently Railtrack and British Energy.

Put the bank into run-off

The Treasury could decide in partnership with Northern Rock’s board that none of the current bidders for the bank offers a good prospect for Northern Rock customers, or that a bidder cannot be found without what the Government considers to be an unattractive extension of the bank’s emergency borrowing. In this case, Northern Rock may be put into run-off. This means that it would continue to service its existing customers but it would stop taking on new business, gradually reducing in size over a number of years. There is a small chance that the run-off could be done profitably, but it would also leave the Government exposed for many years to come.

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