Monday, September 17, 2007

Northern Rock, The Saga Continues


The troubled Northern Rock bank has opened early to deal with fresh queues, as anxious customers look to withdraw money from their savings accounts. Bank boss Adam Applegarth said people were entitled to take out their money.

He said staff were "busting a gut" to ensure all customers were seen, but stressed it was "business as usual".

About £2bn has been withdrawn since Thursday, when the bank applied to the Bank of England for emergency funds, and on Monday its shares were down 28%. In early trade in London the bank's shares, which had lost 32% on Friday, fell from 438 pence to 300 pence. And shares in fellow bank Alliance & Leicester fell by 8.5%.

Meanwhile Chancellor Alistair Darling told the BBC that customers' money was there for them to withdraw, and that it was backed by the Bank of England.

'Logistics exercise'

Northern Rock branches had opened at 0800 BST on Monday - an hour earlier than usual. Mr Applegarth apologised to customers who had had to wait in queues to be dealt with by staff, but said that bank branches had been "extremely busy".

It is understood Northern Rock was almost sold to rival bank Lloyds TSB. However, the deal fell through because of the difficulty of borrowing money in the current financial climate. Mr Applegarth told the BBC he could not discuss possible takeover talks, nor would he confirm the exact amount of cash withdrawn from bank branches since Friday.

"Customers are entitled to get their money - it is a logistics exercise for us, making sure we can look after our customers," he said.

'Hard slog'

On Friday, Northern Rock shares fell 32% and will be closely watched this week. Mr Applegarth said the bank faced a "hard slog" but was sure the brand would recover.

However, he would not confirm how much had been withdrawn.

He told the BBC he was "absolutely confident" that his customers' money was safe, but they were welcome to withdraw it if they wished. Mr Applegarth also said: "Not everybody in the queue is withdrawing money, and not everyone is withdrawing tens of thousands of pounds."

As well as extending its opening hours, Northern Rock has also increased bandwidth on its online banking, which has struggled under the volume of people trying to access the website.

The BBC's business editor Robert Peston said the £2bn withdrawn - which represents about 8% of the £24bn deposits it held on Thursday - was actually less than the mortgage lender and officials at the Bank of England and Financial Services Authority had feared.

However it cannot be certain whether much more will be withdrawn in the coming days, especially from holders of Northern Rock's postal accounts - which contain about £10bn.

Mortgage banks and building societies such as Alliance & Leicester and Bradford & Bingley, as well as the bigger banks, are understood to have seen much of the money withdrawn from Northern Rock.

This suggested there did "not appear to have been a loss of confidence" in other firms.

"Although the risk of contagion has not been eliminated, so far there is no great sign of it," he added.

Nervous bidders

The City watchdog, the Financial Services Authority (FSA), has backed comments from the Treasury, saying it is confident Northern Rock is solvent and savers could continue to deposit and withdraw funds.

"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 chairman Callum McCarthy said.

The BBC has learned that two banks were very interested in acquiring the beleaguered firm.

However, they were concerned about doing such a big deal amid turmoil in money markets and when it was difficult and expensive to raise money from other banks and financial institutions.

The Bank of England has told our business editor the emergency lending facility offered to Northern Rock would be transferred to any new owner.

However once the facility expires - and the Bank will not make the expiry date public - there is no guarantee it would be extended for the new owner.

"Most bidding banks will remain nervous about taking on a balance sheet of Northern Rock's size with the risk hanging over it of needing to refinance a large chunk of loans from the Bank of England at short notice in markets which may remain frozen," Robert Peston said.

Summer markets

Northern Rock's realisation that selling the bank had become impossible in current market conditions, persuaded the board to approach the Bank of England and ask for access to emergency loans, he added.

"Plainly, a takeover would have been a less humiliating option. But it just couldn't be done."

Northern Rock has struggled to raise money to finance its lending ever since money markets seized up over the summer.

Unlike most banks, which get their money from customers making deposits into savings accounts, Northern Rock is built around its mortgage business. It raises most of the money which it provides for mortgages by borrowing from banks and other financial institutions.

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