Fears mounts about exodus of Northern Rock savings

By Steve Slater

LONDON (Reuters) - Fears grew on Saturday that panic among savers at British bank Northern Rock NRK.L will see a run of withdrawals after estimates that 1 billion pounds ($2 billion) have already been taken out.

The Bank of England stepped in on Friday to rescue Northern Rock, Britain's fifth-biggest mortgage provider, pledging to provide emergency funds after a global credit crunch hit the bank's ability to raise cash in money markets.

Customers withdrew about 250 million pounds ($505 million) from branches on Friday, a person familiar with the situation told Reuters, and the Financial Times said a bigger sum had been taken out via its website. The paper, citing an unnamed source, said the total withdrawal was 1 billion pounds, or about 4 percent of deposits.

Northern Rock declined to comment on the amount of withdrawals.

But the bank urged customers not to panic and said it had not drawn on the BoE lending facility.

"It should be reassuring that the Bank of England is prepared to make this facility available," a spokesman said. "They would only have done it for someone that is well capitalized and solvent."

But similar reassurances from the BoE and regulators were not being heeded by thousands of the bank's 1.4 million savers, and panic was evident as long queues formed at its 72 branches for a second day.

"I just can't take the risk of there suddenly being an announcement that...there's been another problem and they've closed the bank. I'm erring on the side of caution," one customer told Sky News.

The funding turmoil and the threat that the run on deposits will gain momentum means it is likely to be taken over by a well capitalized rival, many analysts predict.

The FT said the Newcastle-based lender held talks with several potential suitors, including Lloyds TSB (LLOY.L), until earlier this week, citing people familiar with the matter.

But it said talks were undermined by the shortage of liquidity in the banking system and doubts about Northern Rock's valuation. Sources at several major UK banks have said funding and uncertainty about valuing Northern Rock will make a deal difficult in the short-term, even if regulators encouraged it.

A spokeswoman for Lloyds declined to comment.

RUN ON THE BANK?

Northern Rock, the Boe and the Financial Services Authority have all called for calm, saying the bank is solvent and will continue business as usual.

"We believe Northern Rock should be open for business...it's a solvent firm with a good loan book," a spokeswoman for the FSA said on Saturday.