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Worrying wait for Northern Rock Worrying wait for Northern Rock
(about 2 hours later)
Northern Rock has said it is "business as usual" as it waits to see whether a government promise to protect savers' deposits will reassure customers.Northern Rock has said it is "business as usual" as it waits to see whether a government promise to protect savers' deposits will reassure customers.
Chancellor Alistair Darling has pledged the Bank of England will underwrite all existing deposits. Shares in the bank rose 10% early on Tuesday after Chancellor Alistair Darling pledged the Bank of England would underwrite all existing deposits.
The bank hopes it will slow the deluge of savers closing accounts and the fall in the price of Northern Rock shares. The bank hopes the move will slow the deluge of savers closing accounts.
It has taken out newspaper adverts to emphasise the company is "well-managed" and will not let its customers down.It has taken out newspaper adverts to emphasise the company is "well-managed" and will not let its customers down.
The full-page advert, appearing in most of Tuesday's national newspapers, features a statement signed by Northern Rock's chief executive Adam Applegarth. Share in other banks also rebounded as trading on the stock market got underway. Alliance & Leicester, which saw its shares fall a third on Monday, rose 20%, while Bradford & Bingley climbed 9%.
The Bank of England also announced it would hold an emergency tender to help ease tensions on the short-term money market. The Bank said it will offer £4.4bn at the Bank rate of 5.75% at the tender.
'Troubled times''Troubled times'
He writes: "The simple fact is that the Chancellor has made it clear that all existing deposits in Northern Rock are fully backed by the Bank of England and are totally secure during the current instability in the financial markets. The full-page newspaper advert taken out by Northern Rock contains a statement signed by the bank's chief executive Adam Applegarth designed to reassure savers.
"The simple fact is that the chancellor has made it clear that all existing deposits in Northern Rock are fully backed by the Bank of England and are totally secure during the current instability in the financial markets," the statement says.
"These have been troubled times but Northern Rock will prevail.""These have been troubled times but Northern Rock will prevail."
It comes after three days of long queues at branches up and down the country as customers withdrew more than £2bn of their money. The move comes after three days of long queues at branches up and down the country as customers withdrew more than £2bn of their money - about 8% of Northern Rock's total deposits.
Events of the past few days sent Northern Rock shares tumbling by 35.4% on Monday, and there were concerns too for other institutions. There were still queues of about 70 people at a Northern Rock branch in Golders Green on Tuesday morning waiting for the bank to open even after the government's unprecedented move to restore confidence in the British banking system.
Fellow lender Alliance & Leicester lost almost a third of its value on Monday alone, while Bradford & Bingley saw its shares slip 15%. But in its home town of Newcastle, the streets around the bank were quiet.
'Solvent business''Solvent business'
Banks are already covered by the Financial Services Compensation Scheme which protects 100% of the first £2,000 in any bank account and 90% of the next £33,000 - giving a maximum payout of £31,700 if a bank did go bust.Banks are already covered by the Financial Services Compensation Scheme which protects 100% of the first £2,000 in any bank account and 90% of the next £33,000 - giving a maximum payout of £31,700 if a bank did go bust.
But under the measures unveiled by Mr Darling, Northern Rock savers would not lose a penny, regardless of how much they had deposited.But under the measures unveiled by Mr Darling, Northern Rock savers would not lose a penny, regardless of how much they had deposited.
In effect, this would nationalise the Northern Rock if it went out of business, potentially leaving tax-payers to pick up the bill.In effect, this would nationalise the Northern Rock if it went out of business, potentially leaving tax-payers to pick up the bill.
However Mr Darling, the Treasury and the FSA have repeatedly said that Northern Rock is a solvent business. This has been criticised by the Conservative Party, but Mr Darling, the Treasury and the FSA have repeatedly said that Northern Rock is a solvent business.
See what went wrong at Northern RockSee what went wrong at Northern Rock
FSA chairman Callum McCarthy told the BBC that he welcomed the move by the chancellor.FSA chairman Callum McCarthy told the BBC that he welcomed the move by the chancellor.
"The purpose of this is not to save the Northern Rock per se," he said."The purpose of this is not to save the Northern Rock per se," he said.
"It's to make sure that there's not a negative effect on the banking system overall.""It's to make sure that there's not a negative effect on the banking system overall."
Even if a panic is irrational, if everyone else is rushing to get their money, it is quite rational to want to get your money before it runs out Evan Davis, BBC economics editorEven if a panic is irrational, if everyone else is rushing to get their money, it is quite rational to want to get your money before it runs out Evan Davis, BBC economics editor
However these reassurances have not stopped anxious savers from queuing outside branches of the bank to make withdrawals.
Mr Darling said that people could continue to take money out of the bank, but that if they choose to leave it there it would be secure.Mr Darling said that people could continue to take money out of the bank, but that if they choose to leave it there it would be secure.
BBC economics editor Evan Davis said the chancellor's offer was a "dramatic step" and was, essentially a "money back guarantee".BBC economics editor Evan Davis said the chancellor's offer was a "dramatic step" and was, essentially a "money back guarantee".
"Why have they done it? It's because panics can get out of hand," he said."Why have they done it? It's because panics can get out of hand," he said.
"And even if a panic is irrational, if everyone else is rushing to get their money, it is quite rational to want to get your money before it runs out.""And even if a panic is irrational, if everyone else is rushing to get their money, it is quite rational to want to get your money before it runs out."
Confidence has drained away among many Northern Rock customers, some of who began queuing at 5am on Monday morning to take out their cash. Northern Rock has said that it has not used any of the Bank of England's facility for funds offered to it.
The firm has also said that it has not used any of the Bank facility for funds offered to it. Northern Rock applied to the Bank for emergency funding last week.
Northern Rock applied to the Bank of England for emergency funding last week.
It has struggled to raise money to finance its lending ever since money markets seized up over the summer.It has struggled to raise money to finance its lending ever since money markets seized up over the summer.
Unlike most banks, which get their money from customers making deposits into savings accounts, Northern Rock is built around its mortgage business.Unlike most banks, which get their money from customers making deposits into savings accounts, Northern Rock is built around its mortgage business.
It raises most of the money which it provides for mortgages by borrowing from banks and other financial institutions.It raises most of the money which it provides for mortgages by borrowing from banks and other financial institutions.
WHAT'S HAPPENING AT NORTHERN ROCK? Mortgage lending Northern Rock lends a large amount for mortgages, and finances this with money from banks and savers Savings Northern Rock receives a relatively small amount of money from saversMoney markets Have stopped lending money to Northern Rock due to the crisis in the US sub-prime mortgage marketBank of England Steps into the breach to give Northern Rock an emergency loan Images: PA, GettyWHAT'S HAPPENING AT NORTHERN ROCK? Mortgage lending Northern Rock lends a large amount for mortgages, and finances this with money from banks and savers Savings Northern Rock receives a relatively small amount of money from saversMoney markets Have stopped lending money to Northern Rock due to the crisis in the US sub-prime mortgage marketBank of England Steps into the breach to give Northern Rock an emergency loan Images: PA, Getty
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