Bank 'may seize' Rock's assets to meet guarantee

Northern Rock's depositors were last night told that the Bank of England would take control of their deposits if the mortgage bank were to go into insolvency.

A Treasury spokesman said the guarantee announced by the Chancellor Alistair Darling would work by the Bank of England "assuming control of both the assets and liabilities of the bank in this event".

However, he added: "The FSA has said that Northern Rock is solvent, so the guarantee is not required. It is there if it is required".

Effectively, this would mean that depositors would be able to call upon the Bank of England for their money if the Northern Rock were to fall into insolvency. It would pay them all of their savings while the inevitable mess over what to do with the company was sorted out.

The exact mechanics of how the guarantee would operate were still being worked out last night.

Deposits of less than £2,000 with Northern Rock are already guaranteed under the statutory safety net that covers all bank deposits. However, under that scheme, larger savers would lose some money because it can only pay out up to £31,700 per person, and savers can only receive 90 per cent of amounts held on deposit above the first £2,000. Some £2bn is thought to have been withdrawn from Northern Rock, which holds deposits of more than £20bn.

The Treasury said it would consider making a similar guarantee to other banks "on a case-by-case basis" and declined to comment on whether this now meant the Government was standing behind the UK's banking system.

Northern Rock has already been forced to deposit considerable amounts of mortgage-backed securities with the Bank of England as collateral against the "short-term facility" that it has made available to the company to allow it to handle its financing crisis. That facility is expected to be called upon in the coming days, although the company continued to say it had not been used yesterday.

The Bank of England is believed to have imposed a penal interest charge of 7 per cent on Northern Rock. The decision by the Bank of England and the Government to stand behind Northern Rock is all but unprecedented in modern times and is likely to anger those who have been the victim of previous crises at major financial institutions.