Shockwaves were felt throughout the country yesterday as Northern Rock customers queued to withdraw their savings from the stricken bank after news of emergency funding from the Bank of England threatened to cause a crisis of confidence in British banking.
There were frantic scenes at some of the bank's 70 branches nationwide as customers queued into the street fearing that the country's fifth largest bank might crash. Shares in Northern Rock and other leading banks slumped and other shares on the London Stock Exchange fell, as investors raced to sell up their holdings.
The Government and banking figures urged people not to panic about the state of Northern Rock, which holds deposits of £24bn from 1.5 million savers and lends to 800,000 homeowners.
A joint statement from the Treasury, the Financial Services Authority and the Bank of England declared that Northern Rock was "solvent", trading properly and had strong assets.
The bail-out of the former building society is the biggest challenge to the banking system since the Barings Bank crash triggered by Nick Leeson in 1995.
Northern Rock had to ask for the emergency facility because the recent global credit crunch had shut off its funding for new business. It has expanded its mortgage lending aggressively in recent years by raising funds in the money markets and selling its mortgages as bonds to investors. But the US sub-prime crisis caused investors to panic, closing down the market for these bonds and blowing a hole in Northern Rock's strategy.
The British Bankers' Association insisted there was no reason for alarm, saying: "Everyone should calm down and refrain from making simplistic comments in a very complex area which just cause unnecessary worry and concern."
The emergency funding was agreed with the Chancellor, Alistair Darling, and was unprecedented because the Bank agreed to provide funds to a solvent institution that could not get them elsewhere. For the Bank of England to make the move, it had to believe that the crisis at Northern Rock could damage the financial system and the economy.
Adam Applegarth, Northern Rock's chief executive, disclosed the bank had not used the emergency funding but warned that mortgage costs would rise.