A shudder ran through the economy yesterday in the wake of the Bank of England's emergency loan to keep Northern Rock afloat.
Panicking customers queued in their thousands to empty savings accounts, withdrawing close to £1billion in one day.And the worry among City analysts was that other banks might be forced to resort to similar measures in the light of the global 'credit crunch'.The dramatic scenes followed the admission by Northern Rock, Britain's fifthbiggest mortgage lender, that it was running out of ready money.Its share price plunged by a third - amid falls across the FTSE 100 index - as the market digested the implications of the Bank of England acting as a "lender of last resort" for the first time in more than 30 years.After the news broke, lengthy queues spilled on to the streets as Northern Rock's staff attempted to reassure worried customers they would not lose their life savings.The bank also had to close down its website, which could not cope with the flood of savers trying to transfer their money.Its share price plunged by a third - amid falls across the FTSE 100 index - as the market digested the implications of the Bank of England acting as a "lender of last resort" for the first time in more than 30 years.After the news broke, lengthy queues spilled on to the streets as Northern Rock's staff attempted to reassure worried customers they would not lose their life savings.The bank also had to close down its website, which could not cope with the flood of savers trying to transfer their money.Although Northern Rock has assets of £115 billion, it does not have the ready money needed to pay off some of its existing debts and to give out new mortgages.
As a result, it has been forced to ask the Bank of England for a financial lifeline to allow it to continue trading.Bosses at the bank have predicted that mortgage rates will have to rise for millions of Britons.This is a knock-on effect of the shortage of ready money - or liquidity - in the system.Shares in Northern Rock slumped 31 per cent after City analysts shared their fears that its profits will be severely dented.The company was forced to issue a profit warning, suggesting the bank will this year make around £150 million less than previously expected.Panic took hold among customers despite reassurances from Gordon Brown, Alistair Darling, City watchdogs and the finance industry that Northern Rock remains solvent.However, the company's future looks distinctly rocky and there is every chance it will now be taken over by a bigger rival.It has instituted a series of cost-cutting measures and a recruitment freeze, putting a question mark against the future of its 6,000 staff. One leading economist has condemned the decision to bail out Northern Rock.Professor Willem Buiter of the London School of Economics said the move gave lenders the green light to borrow and lend aggressively in the knowledge the Bank of England would always come to the rescue. He added: "The problem has been caused by a combination of Northern Rock's flawed business strategy and economic reality with what has happened in America. "And I do not see why the Bank of England should have come to their aid because Northern Rock is a fairly small fish anyway. "It would have been better to leave it to the private sector to sort out. The bank is not too large to fail." Northern Rock has some 1.5million customers with £24 billion invested in savings accounts. However, its 800,000 mortgage borrowers have outstanding debts of £100 billion. The Chancellor stressed that the Bank of England's support system was put in place in 1997 to cover exactly the sort of problems being experienced by Northern Rock. He said: "The key thing is to make sure that, on top of a very strong and stable economy here and throughout the world, banks do have money. "There is not a shortage of money in the system but while some of the banks sort out the consequences of the collapse in the U.S. they are reluctant to lend to each other." The Prime Minister's spokesman added: "We have a very well-established system for dealing with financial stability and issues of that kind. "This is not an issue about the solvency of Northern Rock." There are fears that other major banks will also need to ask the Bank of England for help in the near future. But Angela Knight, the chief executive of the British Bankers' Association, said the public can be "absolutely confident" that Northern Rock is a "very sound financial institution". Her calming words failed to reflect the scenes around the country as customers clamoured to take out their savings from local branches.
As a result, it has been forced to ask the Bank of England for a financial lifeline to allow it to continue trading.Bosses at the bank have predicted that mortgage rates will have to rise for millions of Britons.This is a knock-on effect of the shortage of ready money - or liquidity - in the system.Shares in Northern Rock slumped 31 per cent after City analysts shared their fears that its profits will be severely dented.The company was forced to issue a profit warning, suggesting the bank will this year make around £150 million less than previously expected.Panic took hold among customers despite reassurances from Gordon Brown, Alistair Darling, City watchdogs and the finance industry that Northern Rock remains solvent.However, the company's future looks distinctly rocky and there is every chance it will now be taken over by a bigger rival.It has instituted a series of cost-cutting measures and a recruitment freeze, putting a question mark against the future of its 6,000 staff. One leading economist has condemned the decision to bail out Northern Rock.Professor Willem Buiter of the London School of Economics said the move gave lenders the green light to borrow and lend aggressively in the knowledge the Bank of England would always come to the rescue. He added: "The problem has been caused by a combination of Northern Rock's flawed business strategy and economic reality with what has happened in America. "And I do not see why the Bank of England should have come to their aid because Northern Rock is a fairly small fish anyway. "It would have been better to leave it to the private sector to sort out. The bank is not too large to fail." Northern Rock has some 1.5million customers with £24 billion invested in savings accounts. However, its 800,000 mortgage borrowers have outstanding debts of £100 billion. The Chancellor stressed that the Bank of England's support system was put in place in 1997 to cover exactly the sort of problems being experienced by Northern Rock. He said: "The key thing is to make sure that, on top of a very strong and stable economy here and throughout the world, banks do have money. "There is not a shortage of money in the system but while some of the banks sort out the consequences of the collapse in the U.S. they are reluctant to lend to each other." The Prime Minister's spokesman added: "We have a very well-established system for dealing with financial stability and issues of that kind. "This is not an issue about the solvency of Northern Rock." There are fears that other major banks will also need to ask the Bank of England for help in the near future. But Angela Knight, the chief executive of the British Bankers' Association, said the public can be "absolutely confident" that Northern Rock is a "very sound financial institution". Her calming words failed to reflect the scenes around the country as customers clamoured to take out their savings from local branches.
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