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Last Updated: Friday, 9 November 2007, 11:27 GMT
Run on the Bank: Northern Crock
By Adam Harcourt-Webster
BBC Money Programme

Northern Rock is Britain's eighth largest high street bank and until recently was the darling of the City of London. Now it's in crisis, struggling for its very survival, propped up by the Bank of England, and waiting as potential buyers circle.

Customers queue to enter a Northern Rock branch in Chelmsford in Essex
Queues formed at Northern Rock branches across the country

On 13 September, BBC business editor Robert Peston broke the story that Northern Rock was seeking emergency financial support from the Bank of England.

Northern Rock had found itself unable to secure loans from other banks on the inter-bank lending market, the Libor, so the Bank of England had stepped in as lender of last resort. The news set in motion a run on the bank.

Website crash

Early in the morning of Friday, 14 September, Graham Hallworth, a businessman from Macclesfield, was trying to make a routine online money transfer.

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He hadn't heard Robert Peston's report, and found Northern Rock's website didn't appear to be working properly. After a few goes he gave up thinking there was a temporary technical hitch.

In fact Northern Rock's website was seizing up, unable to cope with the volume of savers trying to get their money out.

When the morning papers arrived, Graham saw the headlines and put two and two together. "I made a concerted effort to get onto the website and transfer the money. I tried that for an hour or so without any success at all."

Graham Hallworth decided to go straight to his nearest Northern Rock branch, in Stockport. When he arrived he found he was not alone. Other savers were already there, anxiously trying to withdraw their deposits.

'I was staggered'

With Northern Rock confirming it had agreed emergency funding with the Bank of England, telephone lines were jammed and the queues of savers rushing to empty their accounts grew.

Customers queue to enter a Northern Rock branch in south west London
Online savers could not log on and beleaguered branches

Within hours thousands of depositors were outside Northern Rock's 76 branches up and down the country.

In London Northern Rock saver Pam Hilleard was watching events with horror. She had 780,000 deposited with the bank, the proceeds from a house sale.

Her money was in a 30 day notice account and therefore she couldn't withdraw it until the coming Monday. With a bank run on she was afraid she was going to lose it all.

"I couldn't eat, I couldn't sleep. I was just pacing around like a caged animal," she recalls these September days.

When Monday morning came Pam was up before dawn and down at the Kingston branch of Northern Rock in South West London, by 0530.

"I was absolutely staggered that there were 20 people in the queue before me." Pam was determined to get her money out come what may.

Credit crunch

Northern Rock advert
Northern Rock took out newspaper adverts to reassure its savers

Four days into the crisis and the run on the bank showed no sign of halting. Faith in British banking was being destroyed.

So what financial mess could lead to a fully fledged run on a UK bank with over 20bn of savers' money at risk? And how could a former regional building society that became a bank and grew rapidly into the fifth largest mortgage lender fall apart spectacularly in just a few days?

Events in the American home loans market led to a global credit crunch, where banks stopped lending to each other, and so forced a desperate Northern Rock to appeal for help from the Bank of England.

The UK-wide panic that followed wasn't halted until the late afternoon of Monday, 17 September, when Chancellor of the Exchequer Alistair Darling stepped in to guarantee all deposits held by Northern Rock.

'Financial engineering'

Since then there have been arguments and recriminations over whether the crisis could or should have been prevented, and there has been much focus on Northern Rock itself and its strategy of borrowing money from other banks to lend out as mortgages to new customers.

These mortgages formed assets worth 113bn to the bank, but were only backed by a relatively small amount of savers' money.

The House of Commons Treasury Select Committee has held hearings to examine the conduct of Northern Rock's directors, talking to chief executive Adam Applegarth and also to chairman Matt Ridley, who has now resigned.

Treasury Select Committee member Michael Fallon MP says Northern Rock's strategy was "very aggressive, and in one sense Northern Rock wasn't really a bank at all, it was financial engineering, it was borrowing 75% of its money."

In ruins

No other UK bank appears to have conducted business in the same way as Northern Rock. Michael Fallon thinks the conduct of the company's board has been "quite extraordinary".

Those that handled the crisis for the government, Bank of England and Financial Services Authority, haven't escaped criticism either. Far from it.

The Bank of England's governor, Mervyn King, has criticised the reforms made to banking regulation by the present government, and has been heavily criticised himself for not acting to head off the threat of a credit crunch in the first place.

And what of Northern Rock now?

Its future remains uncertain. Prospective buyers are circling, but the continuing financial crisis makes the final outcome unpredictable.

What is certain is that this once proud institution is in ruins.

The Money Programme: Run on the Bank: Northern Crock, BBC Two, Friday 9 November at 1900

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