The government last night promised to guarantee all deposits held by Northern Rock savers in an attempt to bring an end to the current financial crisis of the loan and mortgage giant.
The Chancellor, Alistair Darling, has said the guarantee would also be extended to other banks in similar circumstances.
In his formal statement, Mr Darling reassured customers that Northern Rock would be able to weather the current financial storm with the full backing of the Bank of England:
“In the current market circumstances, and because of the importance I place on maintaining a stable banking system and public confidence in it, I can announce today that following discussions with the governor and the chairman of the FSA, should it be necessary, we, with the Bank of England, would put in place arrangements that would guarantee all the existing deposits in Northern Rock during the current instability in the financial markets.
“This means that people can continue to take their money out of Northern Rock. But if they choose to leave their money in Northern Rock, it will be guaranteed safe and secure.”
More than £2bn has been withdrawn by customers since the bank applied for emergency funding from the Bank of England last week and shares in Northern Rock were 40% down at one point on Monday and ended 35.4% lower.
And while banks are already covered by the Financial Services Compensation Scheme which protects 100% of the first £2,000 in any bank account and 90% of the next £33,000 - giving a maximum payout of £31,700 if a bank did go bust, under the government guarantee, Northern Rock savers would not lose a penny, whatever their savings.
However, already the impact of the crisis it making waves in other financial sectors and it is feared that first time buyers are the ones that will be worst hit as interest rates rise following the credit crunch on global money markets.
Mortgage customers and in particular new borrowers could end up paying more because the higher interbank rates will cause many of the best-value discount and tracker rates to disappear, meaning existing borrowers who want to switch mortgage provider or refinance could also be hit, as some banks will have to raise their rates.
Luckily, those on fixed rates and existing tracker rates should be spared a rise.
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