by Calculated Risk on 9/17/2007 02:37:00 PM

Note: Video of the Day (bottom of posts) is an interview with customers in a Northern Rock queue this morning.

From the Guardian: Government guarantees Northern Rock deposits

The chancellor of the exchequer, Alistair Darling, this evening promised that the government will guarantee all savings deposits at Northern Rock amid concern that Britain is plunging into its worst banking crisis in decades.

The move follows a dramatic last-minute collapse in the share price of Alliance & Leicester, which fell 32% in late trading this afternoon, and sparked fears of "contagion" from Northern Rock to other financial institutions.

Mr Darling said: "I can announce today that following the discussions with the Governor (of the Bank of England) 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."

This evening queues were still stretching out of the door at branches of Northern Rock across the country, with more than £2bn already taken out by anxious savers. The value of Northern Rock shares fell sharply again today, down by 35%, but in late trading it was overtaken by a startling drop in the share price of Alliance & Leicester, Britain's seventh largest bank.
...
Northern Rock, in a formal statement issued after the Mr Darlling spoke, said that "The Chancellor's statement makes it clear beyond any doubt that all savings in Northern Rock are safe and secure. Consequently anybody who is in a queue outside a branch, or who is trying to access an online account can be fully reassured that there is no cause for concern whatsoever."

It also promised to refund any penalties that savers may have paid when they withdrew their funds from the bank - so long as they put the money back in by October 5. "Any customer who paid a penalty to withdraw their funds from Northern Rock, due to concern over the current situation, will have the penalty refunded if they reinvest those funds in the same type of account with Northern Rock by 5 October 2007," it said.

These are stunning developments in the UK. Clearly there is concern that the run at Northern Rock will spread to other institutions (like Alliance & Leicester).

The UK version of FDIC insurance actually motivates many depositors to remove their bank deposits. Only the first 2000 pounds is 100% guaranteed, and the next 30,000 (or so) is 90% guaranteed. No one wants a 10% haircut, so it makes sense to remove any deposits over 2000 pounds.

This new guarantee should calm depositor's fears.