Rock around the block
So it’s over. The queues have gone. The savings of 1.4 million people are safe. And Britain’s eighth biggest bank is still in business. Phew. Crisis over. Well, not quite.
Northern Rock has been in trouble for a while. Its share price was tumbling long before it had to go to the Bank of England for an emergency loan facility. Its model of lending us money over 25 years but borrowing those funds over three months from other banks had been worrying City analysts for some time. And when that source of credit dried up in early August the problems got worse. On Tuesday Sir Callum McCarthy, chairman of the Financial Services Authority, told the BBC that he thought Northern Rock’s way of doing business was "an extreme model…and [it] has suffered from that." Given that the FSA regulates Northern Rock it does make you wonder why Sir Callum had not said anything to the bank before. Or if he had why it was allowed to ignore him.
But the sound of hooves fading into the distance as the stable door creaked shut was drowned by the screech of tyres as the Chancellor of the Exchequer Alistair Darling made his U-turn on Monday evening. For four days he had refused to promise that the money 1.4 million people had saved up in Northern Rock would be safe. He said the bank was solvent, that its problems were short-term and the Bank of England would only lend money to a sound business. But as thousands of savers laid siege to the bank’s 76 branches and even more jammed its website in a desperate bid to take their money out the Government saw the trust in the country’s banking system – and its own ability to manage the economy – draining away. So on Monday evening the Chancellor said money in Northern Rock would be ‘guaranteed safe and secure’.
That statement was as unprecedented as seeing customers queuing round the block to take out their own money. Until that moment, the Financial Services Compensation Scheme only guaranteed the first £2000 of cash in a bank and would pay 90% of the next £33,000. The rest was not protected at all. So the most you could get back was £31,700 – whether you had £35,000 or £350,000 in your account. Not any more. And it has become clear that the new 100% guarantee for all your money will extend to future deposits in Northern Rock as well as savings in other banks in similar circumstances "during the current instability in the financial markets."
Many people who have lost money after their pension scheme went out of business are saying ‘why no 100% guarantee for us?’ The answer is very simple. The Government does not expect its Northern Rock promise to cost a penny. As it kept telling us, the bank is solvent and savers’ money was safe. Well, as long as they didn’t all try to take it out at once.
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