London, September 15:

The call to the high priests of Britain’s financial system came shortly after the stock exchange shut for business at 4.30 pm on Thursday afternoon.

Northern Rock which in less than a decade transformed itself into one of the UK’s biggest lenders, was in trouble and the court of the Bank of England (BoE) was required to meet in emergency session to decide its fate.

By early evening the grandees — who include the chief executives of Centrica and Vodafone along with leading academics — had arrived at Threadneedle Street to be given a full account of Northern Rock’s problems from the bank’s governor, Mervyn King. His advice was simple — there was a risk that if the bank did not use its lender of last resort capability to stand behind the Northern Rock then a crisis of confidence would ripple through the entire financial system and bring it to a standstill.

The court members quickly agreed and the ba-nk together with the Financial Services Authority (FS-A) approached Alistair Darling, finance minister for his approval to rescue.

The deal was not hammered out until the early hours of Friday morning and only after the chancellor gave his seal of approval. News of the mortgage bank’s problems did not come as a surprise to King and his team. The bank prides itself on keeping its ear close theground in the City — London’s financial district — where there had been rumours for weeks that the former City darling had cash flow difficulties.

The earliest sign of trouble came on Wednesday, when the Bank’s governor, Mervyn King issued a statement outlining precisely what the Bank might do should a major financial institution run into real difficulties. It now seems certain that the Bank, which can easily pick up signs ofstress in individual markets, had brought forward the statement, aware of looming funding issues at Northern Rock. On Thursday afternoon, the Newcastle-based company admitted defeat and contacted the regulator, the FSA.

Details of the rescue package have not been disclosed, but it is believed the Bank demanded a penal rate of interest, close to seven per cent plus more collateral than usual.

News of Northern Rock’s crisis leaked to the media late in the evening, sparking an immediate rush of customers desperate to wi-thdraw money from online accounts. But few succeeded, as the website froze because of the demand.

The bank’s chief executive, Adam Applegarth, said the credit crunch over the last month had forced the board to ditch its mortgage lending strategy and retrench until credit became more freely available on wholesale markets.

“The business model is not appropriate and we will have to evolve and change. Though we will not be the only ones. I think you will see the whole lending environment change,” he said.

He predicted a tightening of lending criteria

and higher interest rates across all mortgage lenders. “Whatever the bank base rate is, you are going to see higher mortgage interest rates.”

Applegarth said he expected to borrow from the central bank on a much smaller scale than he had from the wholesale money markets. The focus would be on existing customers and maintaining their loyalty, he said, “We have made the arrangement with the Bank on the basis that the credit crunch lasts into the new year.”

The first cracks had appeared in June, when the bank issued a profit warning. The race to grab market share had backfired. Applegarth said that, while profits would be hit in 2007, the increased market share would pay off in the following years.

But weeks later the bank was hit by a perfect storm, having to fund mis-priced mortgages as credit markets around the world froze in the wake of the sub-prime crisis in the US.