Bank of England Guarantees Northern Rock Deposits

After the turmoil of the last few days, Northern Rock shares have risen around 8% as the government promises that the Bank of England will protect the deposits of existing Northern Rock savers.

Savers have been queueing for hours to withdraw their money from the high street branches of Northern Rock, worried that the bank would collapse and cause them to lose their savings. Chancellor Alistair Darling hopes that by guaranteeing the savings, the Bank of England would help slow down the rate of withdrawals. Already over £2 billion (about 8% of the total deposits) had already been withdrawn.

The guarantee already seems to be working - Northern Rock now claim that 80% of calls to their customer service line are from customers wishing to reinvest their money in the bank. And, although there were still long queues at some branches this morning (over 70 savers at Northern Rock in Golders Green, and over 50 at the Kingston upon Thames branch), in most branches the flood of worried investors does seem to have abated.

Northern Rock had applied to the government for emergency funding last week, although it hadn't used or received any money from the Bank of England. Despite this, savers panicked and started removing their savings from the Newcastle-based bank. Under the existing Financial Services Compensation Scheme, the first £2000 of an individual's account is guaranteed in the event of the bank going bust. Then 90% of the next £33,000 is also covered, giving a maximum protection for the consumer of £31,700. Any savings over this amount aren't covered at all, and it is likely those savers who were at the front of the queue to remove their money from Northern Rock.