Concerned by the crisis at Northern Rock? Don't panic

Fear not if you've got savings in the bank, you're unlikely to lose out. James Daley explains why

News of Northern Rock's call for help from the Bank of England on Thursday night understandably sent panic waves around Britain yesterday. For many, the first they heard of the emergency was when they saw pictures on television of lengthy queues forming outside branches of the bank – as hundreds of people rushed to cash in the money from their savings and current accounts.

The scenes were more reminiscent of the 1929 depression in America than 21st-century Britain; but the situations are very different. So it's important to put the Northern Rock's dilemma into context.

Northern Rock's problems have been caused by the crisis in the credit markets over the past few weeks, which has seen banks become increasingly wary about lending to each other.

The credit crunch began because a number of mortgage lenders in the US had been lending too much and too freely to consumers with poor credit ratings. As interest rates increased in the US; many of these borrowers were unable to keep up payments on their loans. Unfortunately, this was not just a problem for the banks that lent them the money.

Many lenders packaged up their books of so-called "sub-prime" mortgage debt and sold it to other institutions around the world in the form of high-yielding bonds. When the borrowers stopped paying their mortgages, the bonds were no longer worth as much as the institutions who had bought them thought. This caused a crisis of confidence in debt markets around the world – amplified by the fact that it was not clear exactly how exposed various companies were to the sub-prime crisis.

Although Northern Rock has a perfectly good quality loan book, it makes the majority of its profits from mortgage lending – and has also been willing to lend slightly higher amounts to some new borrowers than other banks. This left the markets particularly reluctant to lend it money over the past few weeks – and as a result, it was forced to go to the "lender of last resort", the Bank of England, to ask for a loan to tide it over.

But this is merely a problem caused by the short-term credit crisis. In fact, the Governor of the Bank of England himself has said that he would only lend to banks which were suffering because of the short-term credit crunch. As far as Northern Rock customers go, it's business as usual. If anything; we may see them raise savings rates over the coming weeks, to try and attract more money onto its books.

"Consumers need to understand that the problem for lenders generally at the moment is in raising funds, not in lending quality," says Michael Coogan, the director general of the Council of Mortgage Lenders. "The Bank of England would not have provided the loan to Northern Rock if it had concerns about the quality of the lender's own business.

"All lenders are facing funding pressure at the moment, and what they need is a return to more normal market conditions as quickly as possible. We welcome the Bank's intervention and confirmation that it is keeping a close eye on the situation."

Nevertheless, the Northern Rock situation certainly focuses minds. Although the chances of a bank going bust in the UK are incredibly slim, it's worth remembering that there's an excellent protection system in place to safeguard investors' money if the worst ever happened.

The Financial Services Compensation Scheme will pay out up to £31,700 to deposit account customers – protecting 100 per cent of your investment up to the first £2,000; and then 90 per cent of the next £33,000. When it comes to investments rather than deposit accounts; the fund will pay out up to £48,000s, including 100 per cent of the first £30,000.

Even when it comes to general insurance – such as your car or home policy – you would still be covered if your insurer went bust. (For more information, visit the fund's website at www.fscs.org.uk).

Of course, the only way to be certain of not losing a penny is by keeping no more than £2,000 in any one savings account – or if you are happy with the idea of receiving 90 per cent compensation, then no more than £31,700. However, if your money is with a big name organisation, you should not need to worry.

Rachel Thrussell, Head of Savings at Moneyfacts.co.uk, the money search engine, says: "For many years it has been taken for granted that the UK banking industry is almost invincible, but with recent uncertainty, savers may be wise to take account of where their savings portfolio is invested.

"It's very unlikely that Northern Rock will be allowed to go under; it is likely that the Bank of England will continue to provide support or the company will prove to be a ripe catch for a competitor takeover."

For those who still want to move some of their savings, the good news is that rates are at a nine-year high. The Government-backed National Savings and Investments, for example, will pay you 6.3 per cent in its cash Isa – more than half a percentage point above the Bank of England base rate.

For details of the current best offers on savings and current accounts, visit www.moneyfacts.co.uk

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

News
Disruption at Waterloo after a person was hit by a train
newsCancellations and disrupted service after person hit by train
Arts and Entertainment
music
Arts and Entertainment
The almost deserted Liverpool Echo Arena on Monday
tvCan X Factor last in the face of plummeting numbers auditioning
News
Kirsty Bertarelli is launching a singing career with an album of songs detailing her observations of “real life”
news
Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Financial Adviser

    £20000 - £60000 per annum: Recruitment Genius: Are you recently QCA Level 4 qu...

    SThree: Graduate Recruitment Resourcer

    £20000 - £22500 per annum + OTE £30K: SThree: SThree Group have been well esta...

    Guru Careers: Application Support Analyst / 1st Line Support

    £25 - 30k: Guru Careers: We are seeking an Application Support Analyst / 1st L...

    Guru Careers: .NET Developer / Web Developer

    £45K - £55K (DOE) + Benefits: Guru Careers: We are seeking a full stack .NET D...

    Day In a Page

    Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

    Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

    How a costume drama became a Sunday night staple
    Miliband promises no stamp duty for first-time buyers as he pushes Tories on housing

    Miliband promises no stamp duty for first-time buyers

    Labour leader pushes Tories on housing
    Aviation history is littered with grand failures - from the the Bristol Brabazon to Concorde - but what went wrong with the SuperJumbo?

    Aviation history is littered with grand failures

    But what went wrong with the SuperJumbo?
    Fear of Putin, Islamists and immigration is giving rise to a new generation of Soviet-style 'iron curtains' right across Europe

    Fortress Europe?

    Fear of Putin, Islamists and immigration is giving rise to a new generation of 'iron curtains'
    Never mind what you're wearing, it's what you're reclining on

    Never mind what you're wearing

    It's what you're reclining on that matters
    General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

    Chuka Umunna: A virus of racism runs through Ukip

    The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
    Yemen crisis: This exotic war will soon become Europe's problem

    Yemen's exotic war will soon affect Europe

    Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
    Marginal Streets project aims to document voters in the run-up to the General Election

    Marginal Streets project documents voters

    Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
    Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

    The real-life kingdom of Westeros

    Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?
    How to survive a social-media mauling, by the tough women of Twitter

    How to survive a Twitter mauling

    Mary Beard, Caroline Criado-Perez, Louise Mensch, Bunny La Roche and Courtney Barrasford reveal how to trounce the trolls
    Gallipoli centenary: At dawn, the young remember the young who perished in one of the First World War's bloodiest battles

    At dawn, the young remember the young

    A century ago, soldiers of the Empire – many no more than boys – spilt on to Gallipoli’s beaches. On this 100th Anzac Day, there are personal, poetic tributes to their sacrifice
    Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves

    Follow the money as never before

    Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves, reports Rupert Cornwell
    Samuel West interview: The actor and director on austerity, unionisation, and not mentioning his famous parents

    Samuel West interview

    The actor and director on austerity, unionisation, and not mentioning his famous parents
    General Election 2015: Imagine if the leading political parties were fashion labels

    Imagine if the leading political parties were fashion labels

    Fashion editor, Alexander Fury, on what the leaders' appearances tell us about them
    Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

    Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

    The architect of the HeForShe movement and head of UN Women on the world's failure to combat domestic violence