The banking industry was rocked when Northern Rock, the major high street mortgage provider, requested access to emergency funding from the Bank of England. It sparked the first run on a bank for a hundred years, as savers feared for their money. After just two days savers had withdrawn £2 billion, which Northern Rock claimed was less than they had been braced for.
The main reason for this crisis was the recent credit crunch that is being experienced by banks across the world due to the troubled American sub-prime mortgage market. Banks have been less willing to lend to each other so the inter-bank interest rate has increased, making it more difficult to obtain money. This has hit Northern Rock most hard because it functions in a very different way to most other banks as it obtains the money it uses to lend to its customers by borrowing from other banks, instead of from money on deposit. The result of the credit crunch was that Northern Rock’s sources of funding dried up, and it was unable to allow itself to be bought as it would have liked in order to solve its problems because no other banks were willing to take on another bank’s balance sheet. It is only the crash in Northern Rock’s share price that has allowed a take-over to become more feasible.
The decision by the Bank of England, under heavy pressure from the Government, to guarantee saver’s money reduced ended the run on Northern Rock, but it has cost not only Northern Rock its reputation but has also damaged the Governor of the Bank of England, Mervyn King, due to criticism that he should have acted sooner. He claims that there is a danger of other banks becoming more careless because they know that they can be bailed out by the Bank of England.
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