What if Northern Rock goes bust?

Customers have been forming queues at Northern Rock branches

The news that the Northern Rock needs to be helped out by the Bank of England will have come as a shock to most customers.

Although it changed from being a building society to a bank in 1997, most people will have assumed that most of the money it lent in mortgages came from the savings deposited by its customers.

In reality, most has been borrowed from other financial institutions - a source that has dried up suddenly in the past month or so.

But what if the unthinkable happened - and the Northern Rock really did go bust?

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Are savings at risk?

Not anymore.

Chancellor Alistair Darling has said that the government will guarantee all existing deposits held by the Northern Rock.

The move is an attempt to reinforce confidence in the beleaguered firm - and try to end the run on the bank which has seen more than £2bn being withdrawn by customers.

Banks are already covered by the Financial Services Compensation Scheme which protects 100% of the first £2,000 in any bank account and 90% of the next £33,000 - giving a maximum payout of £31,700 if a bank did go bust.

But under the measures unveiled by Mr Darling, Northern Rock savers would not lose a penny, regardless of how much they had deposited.

What about mortgage holders?

Contrary to some comment, they have the least to worry about.

If a mortgage lender goes bust, no one will come round trying to repossess borrowers' homes to get the money back.

In reality all that would happen is that the administrator would send borrowers a letter, telling them to keep on paying their monthly repayments.

In the meantime the mortgage, along with all the others, would, in all probability, be sold off to another mortgage company who borrowers would then pay for the remaining life of their loan.

Alternatively another bank might buy up the insolvent bank - lock, stock and barrel.

But people with applications for loans or mortgage applications in the pipeline might find they fell through.

The mortgage business is, in normal times, both steady and profitable, and there would be no shortage of buyers for the Northern Rock's loan book.

And shareholders?

Oh dear. Anyone who still owns shares in Northern Rock has already been losing money.

The shares have lost about three quarters of their value since the start of the year, much of that since the beginning of August.

It is clear that professional investors lost confidence in the bank some time ago, and for precisely the reasons that have now appeared.

In the event of insolvency, the shares would probably be worthless, as shareholders take all the risk and come bottom of the pecking order, after all the creditors.

What about the workers?

The Northern Rock has nearly 6,000 staff and already has a plan to cut their numbers.

If the company went bust, some would almost certainly lose their jobs immediately, as job losses are the inevitable outcome of almost all insolvencies.

But it is worth remembering that the first priority of insolvency experts these days is to try and rescue a business and keep it going, at least for a while.

If an administrator or receiver thought there was a reasonable chance of selling the bank as a going concern, they might well hold fire on any redundancy plans - and leave such considerations up to a new owner.