UK seeks to stem Northern Rock exodus with guarantee

LONDON Mon Sep 17, 2007 2:25pm EDT

Customers queue to enter a branch of Northern Rock in Kingston, Surrey, southern England, September 17, 2007. Shares in Northern Rock slid further on Monday, down as much as 40 percent as depositors continued to withdraw their cash from the embattled mortgage lender, putting its under further strain. REUTERS/Alessia Pierdomenico

Customers queue to enter a branch of Northern Rock in Kingston, Surrey, southern England, September 17, 2007. Shares in Northern Rock slid further on Monday, down as much as 40 percent as depositors continued to withdraw their cash from the embattled mortgage lender, putting its under further strain.

Credit: Reuters/Alessia Pierdomenico

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LONDON (Reuters) - The British government tried to stem the tide of cash pouring out of Northern Rock NRK.L on Monday, promising depositors they wouldn't lose a penny as the bank's share price plunged further and thousands queued to withdraw their savings.

But fears that Northern Rock is not alone in needing funding saw shares in fellow UK bank Alliance & Leicester AL.L tumble more than 30 percent in frenetic trading, forcing it to deny it has also asked the central bank for help and continued to fund itself.

UK finance minister Alistair Darling said if necessary the government and Bank of England would guarantee all existing Northern Rock deposits during the current instability.

Currently an UK industry-funded scheme only protects depositors for 100 percent of the first 2,000 pounds ($3,990) in any bank account and 90 percent of the next 33,000 pounds, giving a maximum payout of 31,700 pounds.

Meanwhile Northern Rock, which was rescued on Friday by emergency Bank of England funding, said it was not in takeover talks but would consider its strategic options.

Britain's fifth-biggest mortgage lender is widely expected to be taken over and said after Monday's close it was not currently in talks with another party but was "actively considering all strategic options".

The bank and regulators said there was no need for investors or customers to panic, and that it remained solvent.

Newcastle-based Northern Rock also said it had not yet drawn on any Bank of England funding, but customers continued pulling out their savings.

"I didn't initially panic but the more you watch the news and read you think maybe we ought to do it as well," said Barbara Williams, retired, as she stood in line with hundreds of others at the Oxford Circus branch in central London.

"We thought we would do what everyone else is doing. Rightly or wrongly it's a chance you can't take."

Fears have mounted that a run of withdrawals will exacerbate Northern Rock's funding problems and force a fire sale of the business. The problems were triggered by the global credit crunch as banks, worried about exposure to dodgy U.S. mortgage debt, jacked up the price of lending to each other.

As the fallout threatened to have wider economic and political impact, Darling said authorities would consider every option to solve the crisis and if people left their money in Northern Rock accounts "it will be guaranteed safe and secure".

Shares in Northern Rock closed down 35 percent at 282.75 pence, following a 31 percent tumble on Friday to cut the bank's market value to under 1.3 billion pounds ($2.6 billion). The shares hit a 7-year low of 257.25p and have lost 76 percent this year.

"The franchise is broken -- the deposit franchise at least -- the run on the bank is happening as we speak and could see as much as 12 billion (pounds) of deposits withdrawn," said Mamoun Tazi, analyst at MF Global. "One way for this to stop is for the bank to be taken over."

Northern Rock provides one in 13 British home loans. The BoE, as lender of last resort, has stepped in to help funding after the bank struggled to borrow in money markets.

News of the emergency funding line sent thousands of Northern Rock's 1.4 million savings customers rushing to its 76 branches and to the Internet for their money.

Customers are estimated to have withdrawn at least 2 billion pounds, which would represent about 8 percent of its deposits, and long queues, Web site problems and a time-lag for postal account customers mean withdrawals could continue.

The reaction of postal account holders will be significant, as they account for 10 billion pounds of the bank's 24 billion pounds of retail deposits.

"YOUR MONEY IS SAFE..."

Northern Rock Chief Executive Adam Applegarth sought to reassure customers that their savings were secure via a message posted on the company's Web site, www.northernrock.co.uk.

"Your money is safe with us and if you want some, or all of it back, then you are perfectly entitled to it. Whilst you may have to wait a little longer than usual to receive it, you will get it," Applegarth said in the message posted on Sunday.

Banks including Lloyds TSB (LLOY.L) have considered buying its rival, according to industry sources, but suitors have been put off by difficult credit markets and uncertainty about the true valuation.

Analysts said the bank, approaching its 10th anniversary as a listed company, is unlikely to survive in its present form.

Options include an outright sale or the slicing up of its 100 billion pound mortgage portfolio among the country's other major banks. Other alternatives could include a rundown of the business in which cash is returned to depositors, branches closed and loans repaid.

Other European bank shares were hit in the wake of the turmoil. Big names such as HBOS HBOS.L and Royal Bank of Scotland (RBS.L) both fell at least 4 percent, A&L shed 31 percent, smaller lender Bradford & Bingley BB.L lost 15 percent and Spain's smaller banks, which are also reliant on wholesale money markets for funding, fell heavily too.

For more stories on Northern Rock and the fallout from its problems, click on nL14376511.

(Additional reporting by Clara Ferreira-Marques, Simon Rabinovitch, Gavin Haycock and Matt Falloon;

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