Northern Rock has had to take out an emergency loan from the Bank of England to restore liquidity. The bank, which is one of the biggest mortage lenders in England, has insisted that it isn’t insolvent but this hasn’t stopped people withdrawing their savings en-masse, making the situation even worse.
One couple – a pair of former hoteliers – is staging a sit-in protest at their local branch because they weren’t able to withdraw £1m from their account which is, to be fair, an unusual and unreasonable request without giving the branch enough notice to get the cash delivered.
Northern Rock, like all banks based in the UK, will be backed by other private and commercial financial institutions. If these backers fail to bail out Northern Rock if they do become insolvent, Northern Rock will still be able to get enough cash to satisfy withdrawals by using lender of last resort facilities from the Bank of England. The Bank of England will automatically lend money to banks to maintain liquidity if they are unable to obtian private finance to do so.
Should Northern Rock continue to have problems with liquidity the Bank of England has the power to administer the bank in the same way as insolvency practitioners administer insolvent companies.
Realistically, there was very little risk to customers of Northern Rock until they started their panic-withdrawals. By needlessly withdrawing their money from the bank they are depriving the bank of the capital it needs to continue day-to-day trading, making it quite inevitible that the bank will cease to become solvent. But before this happens, it is highly likely that the Bank of England, in conjunction with other governtment departments, will stop people from withdrawing money from Northern Rock accounts under powers it has to prevent the collapse of banks and serious damage to the economy.