UK bank Northern Rock faces break-up talk

Troubled British bank Northern Rock faced break-up rumours on Sunday as it sought to reassure panicking customers and investors following an emergency bail-out by the Bank of England.

Worried customers besieged Northern Rock on Friday and Saturday to withdraw their savings — despite assurances from politicians, regulators and the bank itself that it would not fall victim to the global credit squeeze.

More of the same was widely expected when the bank’s branches reopen for business on Monday.

Investors will also look to the group’s share price, which tumbled by almost a third on Friday after the lender was bailed out by an emergency loan from the Bank of England.

The Sunday Telegraph reported that Northern Rock could be sold off following its emergency bail-out.

“Our share price has come off 30%,” chief executive Adam Applegarth was quoted as saying by the weekly newspaper.

“You have got to be vulnerable [to a sale] if your share price has come down. It’s up to the bidders to make a bid.”

The Mail on Sunday paper, quoting senior banking figures, added that rival banking groups would wait before making a move for Northern Rock.

The likes of Barclays, HSBC, Lloyds TSB, Royal Bank of Scotland and French bank Credit Agricole would wait “until their rival is on the point of collapse so they can pick it up for a song”, the paper said.

Northern Rock, Britain’s fifth-biggest mortgage lender, told customers their money was safe as they tried to avert a third day of chaotic queues on Monday.

However, the Sunday Times predicted Northern Rock could lose £12-billion — or half of its deposits — as anxious savers seek to safeguard their cash.

“The question is why wouldn’t you take your money out and put it somewhere else,” the newspaper quoted one senior banker as saying.

“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.”

Politicians and regulators were desperate to stop the panic spreading.

Finance Minister Alistair Darling, who authorised the Bank of England’s bail-out of Northern Rock, said it was vital to maintain stability and confidence in the British banking system.

Meanwhile, the Financial Services Authority (FSA), the chief financial watchdog, reiterated it judged Northern Rock to be solvent.

But that did not stop disgruntled customers rushing to branches nationwide on Saturday.

The Bank of England on Friday agreed an emergency lending facility for Northern Rock, which said it was facing severe difficulties raising cash to cover its liabilities.

Nevertheless, the bank is the first major British financial institution to reveal a serious reaction to the global credit crunch sparked last month by a crisis in the US subprime, or high-risk, mortgage sector.

“In light of the continuing extreme global liquidity crisis, which is impacting markets around the world, we have had to slow down our lending activities and will continue to do so until markets normalise,” Northern Rock told customers on its website.

In response to the question “Are my savings safe?”, the bank said: “Yes. Our relationships with our customers are of paramount importance to us and there will be no change to your account or the service we will provide to you.

“Operationally, the company remains in good shape and the fundamental strengths of the business and brand remain unchanged.”

Darling said Northern Rock was the only bank that had approached the Bank of England for emergency funding.

“The reason that I authorised the Bank of England to make facilities available to Northern Rock is because it is in the public interest that we maintain the stability and confidence in the British banking system,” he told Channel 4 television.

The FSA also sought to calm the situation and the watchdog said any problems experienced by customers online or in branches were “entirely logistical” and “in no way related to the bank’s solvency”.

“To be absolutely clear, if we believed that Northern Rock was not solvent, we would not have allowed it to remain open for business,” FSA chairperson Callum McCarthy said.

The Observer newspaper, meanwhile, said that it was up to Prime Minister Gordon Brown to “clean up this mess”.

“The government has turned a blind eye to the cheap credit bubble because it benefits at the polls when the nation feels flush,” the Sunday weekly’s editorial said.

“The government and the FSA must act on irresponsible lending.

“The cheap credit boom is over. It is time the government acknowledged it too.”

Northern Rock’s share price had plunged by 31,46% to close at 438 pence on Friday.

“Things look really ugly,” the Sunday Telegraph quoted a source close to the bank as saying.

“If the share price falls heavily on Monday, then a fast break-up and sale of the assets looks inevitable.” — AFP

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Roland Jackson
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