Worried customers were expected to keep withdrawing savings en masse on Saturday from embattled British bank Northern Rock after the Bank of England bailed out the lender.
Customers formed lengthy queues outside branches on Friday after Britain’s fifth-biggest home-loan provider said it was facing severe difficulties raising cash to cover its liabilities amid the ongoing global credit squeeze.
Northern Rock is the first major British financial institution to be hit severely by the global credit crunch sparked last month by a crisis in the United States subprime, or high-risk, mortgage sector.
Saturday’s newspapers bore pictures of panicking customers crowding outside Northern Rock branches nationwide to withdraw their savings.
Some reported that about £1-billion had been pulled out of the bank, citing sources.
“The throngs of anxious depositors outside its branches yesterday [Friday] show how quickly financial panic can spread,” read the Financial Times editorial.
“A crisis requires fine judgements and the Bank’s decision to act — assuming it did not respond to political pressure — looks reasonable.”
However, the daily said the Bank of England should charge Northern Rock a sizeable penalty rate and tide it over until it could be sold.
The Daily Telegraph fingered the prime minister in its editorial.
“Gordon Brown must accept responsibility for this credit bubble: in his 10 years at the Treasury, he was happy to benefit from a sense of faux-prosperity based, not on rising productivity, but on house prices, loans and, to a degree, immigration,” the broadsheet argued.
“A snap election, before people realise the full consequences of what he has done, is suddenly looking attractive again.”
The Sun, Britain’s biggest-selling daily, said Northern Rock was not an innocent party.
“The bank has continued to lend customers five times their salary and 125% of their homes’ value despite all warnings of economic instability and an impending fall in house prices,” read the tabloid’s editorial.
“These crazy deals have kept the property bubble inflated for too long. They are almost certain to end now and house prices are sure to fall.”
Shares in Northern Rock, which issued a profits warning on Friday, plunged 31,46% to 438 pence at the close, dragging the European banking sector lower as investors fretted over potential difficulties elsewhere.
Northern Rock, based in Newcastle, north-east England, warned its 2007 profits could be £147-million lower than expected.
“I have withdrawn all my money,” said one worried customer who wished to remain anonymous outside a branch in Harrow, north-west London.
“I know everyone has been urged not to panic but I just felt safer moving the money somewhere else,” she added.
Analysts forecast that the troubled bank was very unlikely to go bust despite the spectre of a “bank run”.
A bank run is when customers withdraw savings en masse due to fear that a lender will become insolvent, which can force the bank into bankruptcy.
Britain’s Finance Minister, Alistair Darling, who authorised the Bank of England to help Northern Rock, called for “international action … to ensure that in the future we can reduce the risk of this sort of turbulence occurring again”.
Global Insight economist Howard Archer said: “Northern Rock’s problems are a consequence of its particular reliance on the money markets to fund its mortgage activities.
“Furthermore, all of the indications are that it is in no danger of going bust and that it has a good quality loan book.”
International ratings agencies Standard and Poor’s and Fitch cut their ratings on the company.
A Northern Rock spokesperson sought to reassure customers, saying that “savings customers’ deposits are safe”, adding “there will be no impact on our borrowers.”
However, many of the bank’s savers were ignoring similar assurances from government ministers and Bank of England officials. — AFP