Banking news
Your Northern Rock crisis guide
17 September, 2007
Savers are being urged to remain calm and not rush to withdraw funds from Northern Rock, however, there are some steps to take to minimise any future possible losses.
How safe is my money?
As savers we rely on banks and building societies to look after our money, never questioning just how safe our hard-earned cash actually is.
Northern Rock customers have been queuing outside branches to withdraw their savings after the bank were forced to borrow money from the Bank of England.
However, your money is actually entirely safe as long as Northern Rock stays solvent. It is the shareholders of the bank that will bear the brunt of Northern Rock's woes, not ordinary customers who have taken out savings accounts.
A spokesperson for The British Bankers' Association said: “The British banking system is carefully regulated and overseen which ensures that all banks operate safely and prudently in the interest of their customers. Everyone should calm down and refrain from making simplistic comments in a very complex area which just cause unnecessary worry and concern.”
What should I do?
If you have an investment up to £35,000 then there really is no need to panic. In the unlikely event of Northern Rock going bust, the the Financial Services Compensation Scheme will pay you 100 per cent of the first £2,000 that you have lost and 90 per cent of the next £33,000, a total of £31,700.
However, you should remember that this is per bank or building society, so if you have £100,000 invested with Northern Rock, you will only receive back 31.7 per cent of this investment.
The best thing to do would be to break up your savings and spread them across several banks if they are substantial, so that you can receive the maximum compensation per bank.
Rachel Thrussell, Head of Savings at Moneyfacts.co.uk – the money search engine explains why savers should not panic.
“Savers should rest assured that Northern Rock is fully regulated by the FSA, with funds also covered by the FSCS (Financial Services Compensation Scheme). This gives savers the peace of mind that the depositor protection scheme will provide £31,700 of cover should a company cease trading.
“But savers should be aware in the case of other companies which are part of a group, that this cover is based at group level rather than for the individual companies. So for savers with investments spread across the group, they will still only receive a maximum of £31,700.
“For many years it has been taken for granted that the UK banking industry is almost invincible, but with recent uncertainty, savers may be wise to take account of where their savings portfolio is invested. It’s very unlikely that Northern Rock will be allowed to go under; it is likely that the BoE will continue to provide support or the company will prove to be a ripe catch for a competitor takeover.”
What is Northern Rocks current situation?
Following the announcement that the bank borrowed money from the BoE, shares fell by 24 per cent. However, Northern Rock only turned to the BoE because it was struggling to raise funds to underpin its mortgage lending as a result of a global credit crisis over the past few months.
Unlike most banks, which get the vast majority of their money from High Street customers making deposits into their savings accounts, Northern Rock is built around its mortgage business. This means that it raises most of its money by borrowing from other financial institutions.
It is unlikely the bank will become insolvent now that the Bank of England has stepped in to support it with an undisclosed sum. Northern Rock is keen to point out that it would not have received this support if the Bank didn't believe that the mortgage provider's fortunes could be turned around.
If we cast our minds back to the collapse of Barings in 1995, the BoE reacted in a very different way, refusing to support Barings because it was unable to quantify the level of losses suffered as a result of Nick Leeson's trading.
A spokesperson for The British Bankers' Association said: “The Northern Rock is a sound and safe bank and there is absolutely no reason for either mortgage customers or savers to worry. Last week’s announcement from the Bank of England, Treasury and the Financial Services Authority simply means that the Northern Rock has had to make alternative arrangements to meet its normal everyday short term borrowing requirements.
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