Northern Rock

Customers queue outside Northern Rock branch in Golders Green [Alex Gunningham - This file is licensed under Creative Commons Attribution 2.0 License]

Tuesday, 18, Sep 2007 12:00

The chancellor Alastair Darling has promised to underwrite all existing savings in Northern Rock in the first resolute move to restore investor confidence since he approved an emergency loan from the Bank of England (BoE) last Friday.

The chancellor made this guarantee last night in an attempt to ease the concerns of panicked Northern Rock customers who have spent the past five days grappling to ensure their finances are secure.

The situation became particularly acute last week as it emerged the chancellor had approved an emergency loan from the BoE to safeguard Northern Rock against instability.

The difficulties have been brought on by the sub-prime mortgage situation in the United States; where lenders specifically target people with blemished credit histories and offer them high interest mortgages.

When these people were unable to pay and it became apparent sub-prime lenders had over stretched, several major US companies went into administration, causing a ripple effect across the Atlantic and ultimately impacting the British economy.

Speaking last night, Mr Darling claimed he was doing everything in his power to calm market tensions, saying: “The support I authorised the BoE to offer Northern Rock last week is designed to overcome these short-term difficulties, and to enable it to do its business in the normal way.

“I can announce today following discussions with the governor [of the BoE] and the chairman of the FSA, should it be necessary, we, with the BoE, would put in place arrangements that would guarantee all the existing deposits in Northern Rock during the current instability in the financial markets.

“This means people can continue to take their money out of Northern Rock. But if they choose to leave their money in Northern Rock, it will be guaranteed safe and secure.”

The markets have responded well this morning, with the FTSE 100 up 15 points. Northern Rock shares are also recovering, up 9 points from yesterday.

The BoE has also said it will be releasing £4.4 billion into the banking market to ease wider liquidity problems.

The chancellor and other members of the Treasury have argued the British economy is “fundamentally sound” and robust enough to weather market shocks. But this has not prevented criticism from opposition leaders, who claim the crisis should have been dealt with more swiftly.

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