The Government cleared the way for a sale of Northern Rock's "good bank" yesterday, saying the state guarantee on deposits would end on May 24.
The guarantee has been in place since 2007, when it was brought in to stave off a run on the bank after news that it had called on emergency funds from the Bank of England saw savers queueing outside Northern Rock branches to withdraw their money.
This ultimately led to the Rock's nationalisation and its split into a "good bank" – Northern Rock plc – which contains most of the deposits and some of the less risky mortgages, and a "bad bank", which holds the majority of the old lender's mortgages and loans.
The Government described yesterday's move as "an important milestone in Northern Rock's return to the independent commercial sector". The guarantee must be removed before this takes place to ensure that the Rock's new owner does not have an unfair commercial advantage.
After May 24, the bank's one million savers will still be eligible for the Government's deposit protection scheme, which covers retail deposits of up to £50,000 per person per institution. The City minister, Lord Myners, said: "The guarantee of retail deposits was a vital step that restored confidence in Northern Rock's operations when its customers were worried about its soundness. Over the last two years, we have worked to get the bank back to financial health.
"We have taken a number of important steps, most recently to divide the bank into a retail business that will be sold back to the private sector in due course, and an asset management company that will remain in Government ownership. Our goal is to see the taxpayer get a good return on [his] investment in the bank and for Northern Rock to focus on providing an excellent service to its customers. Today's announcement shows how far we have come. Depositors can have confidence in Northern Rock."
The fact that the guarantee will not be removed until May 24 suggests that the bank will not be put up for sale until after the election – something that the chairman, Ron Sandler, has indicated in recent statements.
Northern Rock is still expected to attract interest from several bidders when the sale finally begins. Virgin Money, for example, has secured a banking licence and is keen to expand its operations. Other possible bidders could include the National Australia Bank. While informal talks have been held with interested parties, a formal sale process has not yet started.
Northern Rock is one of three "new" banking businesses to hit the market, the others being Williams & Glyn's, which is being spun out of the Royal Bank of Scotland, together with 600 Lloyds branches. These are being sold off to comply with the demands of EU regulators following the vast injections of state aid both banks have received.
Because of the guarantee, Northern Rock had to agree to limit new lending to £4bn in 2009, £9bn in 2010 and £8bn in 2011. Retail deposit balances across the UK, Ireland and Guernsey must not exceed £20bn until the end of 2011. Neither is the bank allowed to rank in the top three of Moneyfacts's mortgage categories for two-, three- or five-year fixed or variable mortgages before the end of 2011, excluding mortgages with a loan-to-value ratio of more than 80 per cent and products for first-time buyers.
People who have products with fixed interest rates, such as savings bonds, will continue to receive that rate for the life of the product, even if it extends beyond the date at which the guarantee is lifted.
On account: What should I do with my savings now?
Q. What will the end of the guarantee mean for the safety of my savings?
A. Savings of up to £50,000 with Northern Rock will still be guaranteed under the Financial Services Compensation Scheme, as with other British savings institutions. Anything above £50,000 will not have the protection.
Q. Should I move my cash from Northern Rock then?
A. If you are worried about having any cash outside the protection scheme then you should move it around to ensure you keep no more than £50,000 in each bank or building society. Bear in mind that interest payments – even the paltry rates offered at the moment – will soon push a £50,000 sum above the limit, meaning the extra cash won't be protected. Check your accounts and sweep any extra cash into a safer home.
Q. Is there nowhere I can get a 100 per cent guarantee on my savings after May?
A. There are two options, although one will end in September. The latter is to the 100 per cent guarantee with Irish banks which you can access through Post Office savings accounts which are run by Bank of Ireland. For a long-term guarantee your only option is the government-run National Savings & Investments.
Q. Should I put all my savings in NS&I then?
A. All the cash is guaranteed by the Treasury, so it is a safe home for your money. However, current returns are not attractive. NS&I's Instant Access Savings Account only pays 0.7 per cent on £50,000, for instance, while the so-called Investment Account pays just 0.3 per cent on £25,000.
Q. So where should I put my cash?
A. There are a lot of better rates around. Coventry building society has a two-year fixed rate bond paying 4.25 per cent, while the AA pays 5.1 per cent fixed over five years. If you want instant access to your cash, Skipton pays 2.76 per cent. You'll find more accounts at www.compare.independent.co.uk
Simon Read, Personal Finance EditorReuse content