BRITISH BANK ROCKED BY RUN

British bank rocked by panic withdrawals

Sep 14 03:04 PM US/Eastern

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.

Shares in Northern Rock, which issued a profits warning on Friday, plunged 31.46 percent to 438 pence at the close, dragging the European banking sector lower as investors fretted over potential difficulties elsewhere.

The Bank of England (BoE) on Friday 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.

"I have withdrawn all my money," said one worried customer who wished to remain anonymous outside a branch in Harrow, northwest London.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

Analysts forecast that the troubled bank was very unlikely to go bust despite the sight of queues in the street raising the spectre of a "bank run."

A bank run is when customers withdraw savings en masse because of fear a lender will become insolvent, which can force the bank into bankruptcy.

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

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

International ratings agencies Standard and Poor's and Fitch cut their ratings on the company and S and P warned of further downgrades if credit conditions worsened.

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

Northern Rock, which is based in the city of Newcastle, northeast England, 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" and adding that "there will be no impact on our borrowers."

However, many of the bank's savers were ignoring similar assurances from government ministers and BoE officials.

One queuing customer said: "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 also warned Friday that its 2007 profits could be 147 million pounds (214 million euros, 297 million dollars) lower than expected.

"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.

Later at a meeting of European finance ministers in Portugal, he called for "international action ... to ensure that in the future we can reduce the risk of this sort of turbulence occuring again."

Speaking before the meeting, 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.

Copyright AFP 2007, AFP stories and photos shall not be published, broadcast, rewritten for broadcast or publication or redistributed directly or indirectly in any medium.

Source: http://www.breitbart.com/article.php?id=070914172730.btxyggv4&show_article=1