Bankers fear L12 billion run on Northern Rock


David Smith, Grant Ringshaw, and Holly Watt
The Times, London
Sunday, September 16, 2007

Northern Rock, the mortgage bank rescued by the Bank of England last week, could see as much as L12 billion -- nearly half its deposits -- withdrawn by worried savers, experts say.

The run on the bank continued yesterday as police were called in to keep the peace when angry and desperate customers besieged branches across the country despite assurances from the Treasury and Bank of England that their savings were secure.

Branches due to close at midday opened until 2 pm, but many hundreds of people were still trying to get their money when the branches closed and minor scuffles and arguments broke out.

Senior executives at Northern Rock spent yesterday at its Newcastle head office monitoring events, but the lender is seen to have little future as an independent entity. It held talks about a possible takeover by Lloyds TSB before the crisis and is expected to be sold off cheaply to a rival.

The bank, which saw £1 billion taken out by worried savers on Friday and at least L500 million removed yesterday, is prepared for a further flood of withdrawals when branches open tomorrow. Many will be by customers with nearly L10 billion in postal accounts, who can make withdrawals only by writing to the bank.

"The question is why wouldn't you take your money out and put it somewhere else," said one senior banker, who predicted L12 billion worth of withdrawals from the bank, which has L24 billion in deposits from savers. "Though Northern Rock is solvent, a lot of people have been gripped by the fear that they might lose some of their savings. It is a huge problem."

One banking analyst warned: "It is not beyond the realms of possibility that they could lose half of their deposit base, if not more."

"We have not had a decent run on a bank for many, many years. The difference now is the Internet and that means you can get your money out very quickly. Banking is about confidence and that has gone from Northern Rock in a spectacular way."

This weekend there was criticism from backbench MPs and economics experts over the authorities' failure to avert the crisis. Mervyn King, the governor of the Bank of England, faces a grilling from a parliamentary committee on Thursday.

Gavyn Davies, the former BBC chairman and Goldman Sachs economist, questioned whether the authorities had been tough enough in monitoring financial institutions. "Once we get into this sort of problem, some sort of rescue becomes inevitable," he said. "Authorities need to impose tougher risk controls when times are good. They have few palatable choices during the meltdown."

Critics believe that regulators should have curtailed Northern Rock's activities earlier. The former building society used to account for 2 percent of the total mortgage market a decade ago, but its share now stands at about 9 percent.

In the first six months of this year, it was responsible for one in five new mortgages and offered generous loans -- up to 125 percent of the value of the property -- to first-time buyers.

David Cameron, the Conservative leader, accused Prime Minister Gordon Brown of having "presided over a huge expansion of public and private debt without showing awareness of the risks involved."

Writing in a newspaper today, Cameron says: "Though the current crisis may have had its trigger in the United States, over the past decade the gun has been loaded at home."

Whitehall officials said the decision to prop up Northern Rock was agreed by the Treasury, the Bank of England, and the Financial Services Authority, the regulator. "We expected this, but there is no need to panic," said a Treasury official. "It is a solvent institution."

But George Mudie, a Labour MP on the committee that will question the Bank of England governor, said: "I'm wondering where it leaves Mervyn King in terms of credibility. Northern Rock"s business model is similar to the private equity industry, which we have been looking at, and there are now a lot of very worried people."

Michael Fallon, a Tory member of the committee, said: "It seems very odd that Mervyn King was saying there would be no bailout. Then he sets out how to do a bailout. And then he does the bailout. We need to understand much more clearly how the decision was taken.

Yesterday, Professor Willem Buiter, a former member of the Bank of England's monetary policy committee, became the first insider to criticise the Bank of England's intervention. "A bailout has occurred that should not have occurred and moral hazard has been injected into the financial markets -- into the financial system -- that wasn't necessary," he said.

However, other senior former Bank of England insiders rallied to King's defence. Sir Alan Budd, who was chief economic adviser to the Treasury during the last Tory administration, said: "My general thoughts are that it is always easy to be wise after the event. I think Mervyn King and his colleagues will have been reluctant to offer assistance until they judged it was absolutely necessary."

Budd also predicted a cut in interest rates to help calm nerves.

Police were called to help bank staff deal with "boisterous customers" at branches in Glasgow and Sheffield yesterday, advising at least one store to close its doors. In Manchester staff handed queueing customers chocolates to placate them.

Ernest Floate, a retired civil engineer whose pension was hit when Equitable Life almost collapsed four years ago, was one of hundreds of people at a branch in Kingston, southwest London, from 6 am yesterday. "When I heard the news I just thought, 'Oh no, not again,'" he said.

One couple from Islington, north London, tried to withdraw L250,000 in savings from the Golders Green branch. The wife, a retired nurse, said: "I don't trust the bank. I feel I need to close the bank account and take my money elsewhere."

Outside the Bolton branch, Janet Walker from Atherton said: "I've completely lost confidence in Northern Rock and just want to get my money out."

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