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Panic spreading, Britain guarantees all Northern Rock deposits

Section: Daily Dispatches

By Jean Eaglesham, Peter Thal Larsen,
Chris Giles, and Lina Saigol
Financial Times, London
Monday, September 17, 2007

LONDON -- Alistair Darling, chancellor of the exchequer, has announced that the government will guarantee all deposits of Northern Rock account holders as ministers sought to calm savers' fears.

Mr Darling's actions came amid signs of the panic that was spreading across the banking sector, with shares of Alliance & Leicester falling 31 percent on concerns that the bank would be the next to turn to the Bank of England for assistance.

Mr Darling said in a statement that "should it be necessary, we and the Bank of England will put in place arrangements that guarantee all the existing deposit arrangements."

The existing deposit guarantee scheme protects part or all of the first L35,000 of an individual's savings only.

The chancellor is anxious to prevent the surge of withdrawals from Northern Rock, which has seen queues outside all of the struggling bank's branches, triggering a wider crisis of confidence in the UK's financial system.

The state guarantee came after savers again beseiged the bank's branches. About L2 billion has been withdrawn since Thursday, when the bank applied to the Bank of England for emergency funds.

Northern Rock shares plunged by a further 35 percent in afternoon trading as the mortgage lender and its regulators prepared to try again to arrange a sale.

As depositors continued to withdraw their savings from Northern Rock -- with some reported to have begun queuing as early as 4 a.m. on Monday -- people familiar with the matter said the bank and its advisers were planning a new push to find a "commercial solution" that would allow it to be sold as a going concern.

Northern Rock held talks with Lloyds TSB, the UK's fifth-biggest bank, as recently as last Monday. Those discussions were undermined by the turmoil in the credit markets and the Bank of England’s reluctance to offer financial support to facilitate a deal, people familiar with the matter said.

However, the central bank on Sunday indicated that the credit line it had provided to Northern Rock would not be removed in the event of a sale. "We have agreed that any bidder would be able to take on the facility for any unexpired term left," it said.

Any renewed takeover interest will depend on whether Northern Rock's business can be stabilised. About L2 billion ($4 billion) has now been withdrawn by savers. But people close to the bank say the figure -- about 8 percent of total deposits -- is lower than initially feared.

Sir Callum McCarthy, chairman of UK regulator the Financial Services Authority, and Mr Darling both stressed over the weekend that the bank was solvent.

If no buyers come forward, it seems likely Northern Rock's business will be gradually wound down, effectively leaving it with a shrinking mortgage book as loans are repaid. Its advisers are thought to have calculated that, in this situation, it would be worth about 180p a share.

The shares fell 35 percent to 282.75p on Monday. Other bank shares also fell sharply, with Alliance & Leicester down 31 percent, Bradford & Bingley down nearly 15 percent, and HBOS 5.5 percent lower.

The Bank of England has been stung by criticism that it is providing a bailout to Northern Rock and wants the terms to be published so it can demonstrate how tough they are for Northern Rock's shareholders. The central bank said: "We expect the terms to be disclosed in due course."

Northern Rock executives spent the weekend trying to ensure the business was functioning, and organising the delivery of sufficient cash for customers to make their withdrawals. They are also seeking to fix the bank's website, which has been struggling with the high volume of traffic.

Adam Applegarth, chief executive, again sought to reassure Northern Rock customers in a statement published on the lender's Internet site on Sunday.

"Your money is safe with us and if you want some or all of it back, then you are perfectly entitled to it," he said. "Whilst you may have to wait a little longer than usual to receive it, you will get it. However, your savings are secure and there is no need for you to withdraw your money based on our recent announcement and the widespread media coverage that has ensued."

His comments were echoed by Mr Darling, who told BBC Radio 4's "Today" progamme: "If people want to get their money out of Northern Rock, they can. The money is there and it is backed by the Bank of England so they can get it."

Mr Darling added: "The problem at the moment is not that there isn't money in the system, because the banks do have a lot of money. It is the fact that they have been reluctant to lend to each other whilst they work out what the extent of their risk is following on the difficulties in the American market."

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