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Northern Rock's shaken depositors find solace in Nationwide

23 November 2007
When frightened customers started withdrawing their savings from Northern Rock, sparking the first run on a British bank for more than a century, Nationwide took up the slack and has reported a huge rise in deposits for September.

The building society said that it took in 96 per cent more in the six months to September than at the same period the year before, totalling £4.1 billion, £1.8 billion of which was deposited in September. This huge influx of cash provided Nationwide with adequate money to fund its mortgage lending for six months without having to borrow from the wholesale markets.

Unlike Northern Rock, which has a lot of exposure to sub prime mortgages and has relied on the wholesale markets for 75 per cent of its funding, Nationwide has used them for just 29 per cent of its funding, making it considerably less vulnerable to the credit crunch.

Despite benefiting from Northern Rock's downfall, however, Nationwide is not immune to the credit crisis, as it has revealed a £35.1 million hit from its seven SIVs (Structured Investment Vehicles), and has had to inject cash into its investment portfolio itself because investors are experiencing a crisis of faith in the market.

Meanwhile, Northern Rock and its advisors are working hard to whittle down the list of bids for the struggling bank, and are hopeful of making a shortlist early next week. The bidders now include a consortium led by Welsh entrepreneur Alfred Gooding, the Virgin Group, JC Flowers, Cerberus, Olivant, ING, private equity firm Apollo and buy-out company Thomas H Lee.

The longer the bank takes to make a decision, the more its debt escalates; it has reportedly borrowed another £1.1 billion from the Bank of England in the last week, bringing its total debt up to about £26 billion, suggesting that its financial situation is deteriorating further and could continue to do so until a solution is met.

This, and the damage that the fiasco is feared to be causing to the image of the City overseas, is prompting the chancellor Alistair Darling to find a quick resolution for the lender which had to borrow from the Bank of England - the lender of last resort – when it experienced serious liquidity issues in the summer as a result of the sub prime mortgage crisis in the US.

The crisis is causing problems on all levels, right down to the consumer who is experiencing high interest rates, bigger mortgage repayments, stricter lending criteria and lower spending limits. Despite the crisis, however, it is believed that the Bank of England could be deterred from making a rate cut because of inflationary fears and record prices for oil which are nearing $100 a barrel.

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