Bankrupting a Bank

Today was the second day of queues outside branches of the Northern Rock bank as savers rush to withdraw their savings after the bank applied for emergency financial support from the Bank of England on Thursday. The first time anybody has had to do this since the 1970’s.

There have been regular assurances that the bank is in no immediate danger of collapse – the bail out is apparently needed to help cash flow. The problem is that the Northern Rock business is primarily built on mortgages, so the question is whether the rush to withdraw savings is only going to make things worse.

Current estimates are that 4%-5% of savings in the bank have been withdrawn, which considering that this in part underpins the mortgage business could be a problem.

However if it all goes under, who loses out? Least to lose are the mortgage holders – essentially they’ll just end up paying back the money to whoever picks up the Northern Rock mortgage business. Savers are protected by Financial Services Compensation Scheme, but for anybody with savings over £2000 they won’t get back everything – hence why savers are withdrawing money now. The current scheme would cover the whole of the first £2000 then 90% of the next £33,000. Any money above £35,000 could be lost altogether. Shareholders probably have the most to lose, although any who still have their shares has lost a pretty large amount already.

Thankfully I don’t have either savings or a mortgage with the Northern Rock – but I can well understand savers withdrawing their money – and I’m also going to be keeping an eye on those banks I do have dealings with just in case!

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