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British bank hit by panic withdrawals
Customers queue to enter a Northern Rock branch in Bromley, in southeast London. Anxious customers of British bank Northern Rock rushed to withdraw their savings Friday, forming lengthy queues in front of branches after the lender was bailed out by the Bank of England. (AFP/Ben Stansall)

British bank hit by panic withdrawals

September 13, 2007

LONDON - Anxious customers of British bank Northern Rock rushed to withdraw their savings on Friday, forming queues in front of branches after the lender was bailed out by the Bank of England.

The central bank came to the rescue of Britain's fifth-biggest home loan provider, which said it was facing severe difficulties raising cash to cover its liabilities amid the ongoing global credit squeeze.

From London to Edinburgh, panicking customers were pictured on British television channels crowding outside Northern Rock branches to withdraw their savings.

Shares in the group, which issued a profits warning on Friday, plunged 31.77 percent to 436 pence nearing the close, dragging the European banking sector lower as investors fretted over potential difficulties elsewhere.

International ratings agency Standard and Poor's cut its rating on the company and warned of further downgrades if credit conditions worsened.

But analysts forecast that the troubled bank was very unlikely to go bust despite the appearance of a "bank run."

A bank run is when customers withdraw their savings en masse because of fear a lender will become insolvent, which can cause it to go bankrupt.

"Northern Rock's problems are a consequence of its particular reliance on the money markets to fund its mortgage activities," said Global Insight economist Howard Archer.

"Furthermore, all of the indications are that it is in no danger of going bust and that it has a good quality loan book."

S & P said that the bailout by the Bank of England "considerably strengthens Northern Rock's funding and liquidity."

Northern Rock is the first major British financial institution to be severely hit by the credit crunch sparked by the US home loan crisis.

A global credit crunch erupted last month, sparked by a crisis in the US subprime, or high-risk, mortgage sector.

Banks became nervous about lending to each other because of fears about bad investments linked to US home loans, leading to a shortage of cash for lending purposes.

Central banks around the world have pumped billion of dollars of emergency funds into the banking sector to enable banks to continue normal lending practices.

The Bank of England said it had made available an unspecified amount of cash to Northern Rock in the form of a liquidity facility.

This "will be available to help Northern Rock to fund its operations during the current period of turbulence in financial markets while Northern Rock works to secure an orderly resolution to its current liquidity problems," the bank said.

A Northern Rock spokesman sought to reassure customers, saying that "savings customers' deposits are safe" adding that "there will be no impact on our borrowers."

However, many customers were simply ignoring similar assurances from government ministers and Bank of England (BoE) officials.

"I have withdrawn all my money," said one worried customer who wished to remain anonymous outside a branch in Harrow, north west London.

"I know everyone has been urged not to panic but I just felt safer moving the money somewhere else rather than worrying about Northern Rock's financial position over the next few days," she added.

Another customer added: "I'm not sure about this, even though they say it is going to be all right.

"If they are short of funds, what happens to our funds?"

As well as hitting lenders globally, the world credit squeeze played a major part in the dollar slumping to a record low against the euro this week, and caused stock markets to plunge earlier this month.

Northern Rock warned Friday that its 2007 profits could be 147 million pounds (214 million euros, 297 million dollars) lower than expected, sending its share price plunging by nearly a third in London trading.

"It will be a slog after a day like this to repair the bank and we are up for the slog," Northern Rock chief executive Adam Applegarth told Sky News.

Britain's finance minister Alistair Darling, who authorised the BoE to help the bank, said its problems might have been avoided had US banks not been so willing to offer cash to borrowers with poor credit histories.

Darling said it had been "some time" since the Bank of England had been placed in such a situation, while some commentators suggested it last occurred about 30 years ago.

"My objective all the time is not just to have a strong and stable economy but to ensure we've got stability in the banking system," Darling told BBC radio.

"That is why I authorised the Bank of England to provide that support for Northern Rock, it was the right thing to do."

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