Alliance & Leicester shares take a beating

Panic among savers spread to investors yesterday as Alliance & Leicester's shares lost nearly one third of their value on fears it would be the next bank to ask the Bank of England for emergency funding.

A&L was forced to go public to head off the panic, saying it knew of no reason why the shares had plunged and had not sought Bank of England funding.

With customers queuing to take money out of Northern Rock, Alliance & Leicester had to try to ward off fears that could have led to a run on its funds.

"The worrying thing from Alliance & Leicester's point of view is that unless they move quickly to dispel any rumours they may see queues of people outside their branches," Rensburg Sheppards fund manager Colin Morton told Bloomberg.

The panic knocked £1.2bn off the bank's market value as its shares had their biggest fall for at least 10 years.

A&L put out a detailed statement on 4 September saying that the credit crunch had no material impact on its profit or franchise growth.

The bank said yesterday that if anything had changed since then, it would have made a statement to the Stock Exchange.

In a further indication that Alliance & Leicester was not short of funds, the bank bought back its own shares yesterday.

Customers continued to queue outside Northern Rock branches and deluge its website to get their money out because the stricken mortgage lender had asked the Bank of England for emergency funding last week. At the end of another tumultuous day, the Government stepped in to say that it would guarantee all existing Northern Rock deposits.

Northern Rock's shares continued to fall, dropping a further 35 per cent. The shares have lost 58 per cent of their value since Friday morning, when the bank issued its second profit warning of the year and said it had asked the Bank of England for emergency funds.

Lloyds TSB pulled out of talks to buy Northern Rock early last week, and industry sources had said a rescue of the business looked unlikely. Northern Rock said yesterday that it was not in talks with a buyer, but was looking at all its options.

Other casualties of the sell-off included Bradford & Bingley, which fell by more than 15 per cent. Bradford & Bingley said last week it had about £5bn of funding stored away, enough to last it at least until the end of this year.

Barclays and HBOS, the owner of Halifax, reported an inflow of deposits as savers rushed to put their money into strong institutions.

Northern Rock had to go to the Bank of England because it funded its mortgages in money markets that had seized up in the credit crunch.

It used the money markets because it had relatively few depositors to fund its lending.

Former building societies such as Alliance & Leicester and Bradford & Bingley tap the money markets to fund their lending because they do not have millions of current account customers like the big four banks. Neither bank is as reliant as Northern Rock on these markets.

Analysts said thatNorthern Rock's funding crisis came about because it had hugely increased its lending in the first half of this year, just before the market seized up. Neither Alliance & Leicester nor Bradford & Bingley followed such a risky strategy.

Northern Rock tried to use the Governments's backing to steady customer nerves. The bank's chief executive, Adam Applegarth, said that the Chancellor's intervention meant customers' deposits were secure.