Is another bank run on the cards?
Concern is mounting that the nationalisation of Northern Rock could lead to customers withdrawing their savings from other banks.
The government's rejection of two private sector takeover bids for the troubled bank means that saving deposits in the Rock are effectively government-backed.
Although all savers in British institutions have the first £35,000 of their savings protected by the Financial Servies Compensation Scheme, Northern Rock savers have 100% of their savings guaranteed by the government. This measure was introduced following the run on the bank in September as a necessity to stop savers withdrawing their money.
However, in a House of Commons session on the nationalisation, opposition MPs attacked Alistair Darling for creating an unfair playing field in the banking sector.
Several MPs questioned what was to stop people from transferring their savings from every other bank and building society in the UK into Northern Rock. Concerns were also raised that by keeping the Northern Rock saver guarantee in place, the government was giving the bank an unfair advantage over its competitors. It was also questioned whether this was within European Union rules on competition.
Darling said it would be a mistake to remove the guarantee, which he claimed is maintaining stability at Northern Rock as well as protecting depositors’ money. As it stands, the government must give three months' notice before it can remove the guarantee.
A financial services lawyer, Rosenblatt Solicitors, has now warned that nationalising Rock is anti-competitive and could be inconsistent with EU subsidy regulations.
Nigel Frudd, head of financial services at Rosenblatt Solicitors, said: “[Nationalisation] provides Northern Rock with a guarantee that other banks cannot match and, in fact, could indirectly have exactly the opposite effect of what the government was trying to avoid – another run on the banking system.
“The major banks are desperate to collect deposits for capital adequacy reasons and you can see this in the rates they are offering in the high street. A major shift to Northern Rock could make the banking system vulnerable.”
This risk is more prominent considering the competitive range of savings products Northern Rock currently has on the market.
Kevin Mountford, head of savings and current accounts at Moneysupermarket.com, said there has been a significant increase in the number of people applying for Northern Rock accounts since the government's announcement of nationalisation.
He added: "If everything else is equal, then why not save with Northern Rock. Other banks may be feeling bitter about this, as despite poor management Northern Rock is now in a stronger position than them."
During the Commons session, Ronnie Campbell, Labour MP for Blyth Valley, told Darling that he would be putting his money in the “people’s bank” first thing in the morning.
Darling replied that he was sure Northern Rock would be pleased to hear it.
However, he objected to criticism that the savers guarantee was against EU regulations. The government has until 17 March to present the restructuring of Northern Rock to the EU – including if and how state support will continue.
Darling told the Commons that Ron Sandler, who has been appointed to run Northern Rock at a rate of £90,000-a-month, will have commercial autonomy in creating a new strategy for the bank.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.