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Fears mounts about exodus of Northern Rock savings
September 15, 2007 / 8:37 AM / 10 years ago

Fears mounts about exodus of Northern Rock savings

<p>The sign of the Northern Rock bank is seen outside a branch in central London September 14, 2007. Fears grew on Saturday that panic among savers at British bank Northern Rock will see a run of withdrawals after reports that 1 billion pounds had already been taken out. REUTERS/Dylan Martinez</p>

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.

But high profile media coverage of the crisis is likely to fan concerns among savers.

“Panic on the High Street”, “Run on the Bank” and “How Safe is Our Money” were some of the UK newspaper headlines.

The bank’s website and telephone services have had problems and many customers complained that they couldn’t access their accounts, but the bank said this was simply due to the high level of usage.

Branches were kept open late on Friday and many were kept open beyond normal Saturday morning hours.

A spokesman said the bank had prepared for withdrawals and expected to have enough cash available.

The Daily Telegraph said one panic-stricken businessman and his wife barricaded the Cheltenham branch manager in her office on Friday as they sought to empty their 1 million pound account.

Northern Rock has been the first major UK casualty of a credit crunch during the last two months as it relies on the wholesale markets for three-quarters of its funding needs.

If retail deposits, which had stood at 24 billion pounds and provided the remaining quarter of its funds, are withdrawn it will exacerbate the problem and increase the amount it needs to borrow from the BoE at a penalty interest rate.

Additional reporting by Peter Griffiths

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