Last week, Northern Rock revealed that it had to ask the Bank of England for emergency funding to help with its balance sheet and keep its business ticking over. The warning sent Northern Rock's shares tumbling, and provoked its worried customers to besiege their local branches in panic to withdraw their funds - despite assurances from politicians, regulators and the bank itself that their money was safe.
Why did this happen?
Northern Rock's request for emergency funding from the Bank of England is all down to the global credit squeeze. Back in February, lots of homeowners in America began to default on their mortgage repayments. Many of these had sub prime mortgages, or mortgages for people with a patchy credit history. Most of these sub prime loans were packaged up and then sold on as structured products to financial institutions.
In order to buy cheap debt, such as sub prime loans, banks like to lend money to each other – but the sub prime crisis in America and confusion in the money markets has made it difficult for banks to do so. This is because they are not sure just how much exposure they all have.
Northern Rock tends to use the financial markets much more than other banks, having around £325 million invested in structured debt products. A large amount of its money is borrowed from other banks, so as a safety measure, Northern Rock was forced to ask the Bank of England for an emergency loan.
Is Northern Rock going to go bust?
It is highly unlikely that Northern Rock will collapse. The Bank of England, the Treasury and the Financial Services Authority all looked at Northern Rock's accounts and all agreed that it had a sound business plan. Support from the Bank of England is only given to companies that are solvent, with a sound future and good balance book, so Northern Rock will stay afloat.
What if I have savings with Northern Rock?
If you have savings, then the important message is not to panic. The Financial Services Compensation Scheme protects your first £2,000, and then 90% of the next £33,000, so if you have savings of under £35,000 then you have protection.
Why not use this opportunity to get a better deal elsewhere and spread your risk with a more diverse portfolio of different providers?
A diverse portfolio will also stand you in good stead. Top of your list should always be a cash ISA, but also consider a fixed rate savings bond if you have a lump sum you can afford to lock away. A regular savings account will be ideal if you have a little to put away every month.
Why not search for a savings account with the help of Moneyfacts.co.uk Savings Account Best Buys.
But what if my mortgage is with Northern Rock?
Again, the message is don't panic. Northern Rock is the UK's fifth biggest mortgage lender, so its £100 billion mortgage book is highly attractive to other banks. The most likely scenario is that Northern Rock will be taken over, so just keep up your mortgage repayments as usual.
If you have a mortgage that is coming up for renewal however, then you should start searching for a better deal with another provider. Read our article on whether to fix or to track first, and then search for a mortgage tailored for your needs. Our Mortgage Best Buys will help give you a better idea of what's out there.
What if I have a personal loan?
If you have a personal loan, then the rate on it will be fixed so there is no need to worry. If you need another loan however, don't go to Northern Rock. Personal loan rates are rising – so it's important to act sooner rather than later. Search for a loan with our Personal Loan Best Buys.
Will other banks suffer Northern Rock's fate?
It is doubtful. Northern Rock has had an aggressive business model for years and is now paying the price. Chancellor Alistair Darling has stressed that the British economy is strong and has low interest rates, which will allow politicians and officials to deal with the problem.
However, as the credit crisis sees no sign of abating, it will more than likely start to affect banks' profits. People with poor credit history will probably start to find it increasingly difficult to get a loan or mortgage, or may have to pay more for it.
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