Government to cut Northern Rock savings guarantee

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The Independent Online

The 100 per cent guarantee on savers' deposits held within Northern Rock is to removed within weeks as the Government steps up plans to return the nationalised bank to the private sector, it was reported today.

It is understood the Treasury is planning to give three months' notice before taking away the cast-iron guarantee, introduced by the Chancellor on all Northern Rock deposits in 2007 to halt the run on the bank.



Once removed, customers will revert to the same level of protection offered to all UK savers where the first £50,000 is insured by the Government, although it is thought those who took out individual savings accounts and longer-term bond products since September 2007 will retain the 100 per cent guarantee.



The move is seen as another major milestone in the sale of Northern Rock, following its split in two on January 1, when it spun off a savings and mortgage bank called Northern Rock plc - effectively the "good" part of the bank which will be sold off into the private sector.









Reports suggest the Northern Rock savings guarantee could be dropped by the end of this month, with a sale to follow soon after.

The bank's more toxic loans have been retained in the existing bank, renamed Northern Rock Asset Management, which is likely to remain in public ownership.



It is believed the Government is planning to merge this retained business with Bradford & Bingley's mortgage book, which was also taken into state ownership.



Suitors are reportedly lining up to take over Northern Rock, with Sir Richard Branson's Virgin Money and Tesco, which has a burgeoning personal finance business, said to be among those considering bids.



Northern Rock was taken into public ownership in 2008 after its credit crunch woes sparked the first run on a UK bank in more than a century.



The group was one of the first victims of the credit crunch to fall foul of a reckless lending culture seen during the housing boom.



The 100 per cent savings guarantee was vital in helping to calm savers, thrown into a state of panic when it emerged that Northern Rock had called on the Bank of England for emergency funding.



But the removal of the protection is seen as an important step in its rehabilitation and to create a level playing field with other banks.



The group was given greater freedom to compete for new retail deposits after limitations on how much share of the market it could take were lifted at the start of the year.



Building societies have argued that the 100 per cent guarantee is an unfair advantage for the state-owned player.



The bank which will be put up for sale comprises around £19 billion in retail savings and some £10 billion in residential mortgages - an attractive leg-up for those groups looking to enter the UK banking sector.



Virgin Money, headed by chief executive Jayne-Anne Gadhia, is widely seen as a front-runner having launched a failed bid for Northern Rock before it fell into public hands.



It recently snapped up a small regional deposit taker, called Church House Trust, to give it quick access to a banking licence.



There are also a number of other new competitors hoping to enter the sector, such as London-centric Metro Bank and Walton & Co, launched by former analyst Sandy Chen, although these are not expected to be first in line to bid for Northern Rock.



No-one was immediately available for comment from Northern Rock or the Treasury.

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