Page last updated at 20:58 GMT, Monday, 4 February 2008

Q&A: What next for Northern Rock?

Chancellor Alistair Darling
Mr Darling has come under pressure for his handling of the crisis

Two parties have come forward with rival rescue proposals for Northern Rock - Sir Richard Branson's Virgin Group, and the bank's own board.

The government now has to chose the winner.

Which offer is likely to succeed?

It is far too early to tell.

While Virgin is proposing to inject more new funds into the Rock - 1.25bn compared to 500m proposed by the in-house team - the Rock managers have already secured significant backing.

The support for the Rock board has come from Northern Rock's second largest shareholder - RAB Capital.

A spokesman for RAB Capital said the offer from Northern Rock's management was the "only one strong and independent solution".

When will the government make its announcement?

The government needs to decide on the Rock's future by the end of this month.

This is so it can then go the European Commission to get approval for any rescue deal by 17 March, the cut-off date for the current 55bn of financial assistance given to the Rock from the Bank of England.

While the government remains committed to finding a private sector buyer, analysts said nationalisation of the Rock could remain a possibility is neither the Virgin or in-house offer is ultimately deemed acceptable.

How is the government helping allow a private sale?

Under the government's proposals, the 25bn debt that Northern Rock owes the Bank of England will be converted into Treasury-baked bonds.

The idea is that Northern Rock bonds will be sold in batches to thousands of investors.

Over time this will allow Northern Rock to drip feed the money it owes back to the Bank of England, thereby easing the pressure on any new private buyer.

What is a bond?

The simplest way to explain it is as an IOU, or a promise to repay money at a later fixed date.

An investor who owns a bond is actually lending money to the issuer to help it finance its operations.

Basically, the Northern Rock will promise to give investors their money back, and in the meantime will pay them interest.

Are these bonds safe?

Some bonds are safer than others, depending on the risk profile of the company or government.

UK government bonds are considered one of the safest places you can put your money because they are insured by the state.

As the Treasury has said that the government will insure the new Northern Rock bonds, this means that they will be as safe as UK government bonds, or gilts.

I have savings with Northern Rock. Will I be OK?

Northern Rock savers are in the strongest position of any group affected by the crisis.

The Treasury has put in place a specific guarantee protecting all retail deposits held by Northern Rock.

This exceeds the normal protection offered to savers under the Financial Services Compensation Scheme, which currently guarantees 100% of the first 35,000 saved with an bank.

Money in all existing, re-opened and future Northern Rock savings accounts is guaranteed.

What about mortgages?

Northern Rock home loan holders will not be affected by what happens and will have to continue paying their monthly mortgage charges as normal.

However, once the term of their home loan comes to an end, they might find that repayment rates are not as low as they were, and may need to shop around for a better rate.

Why save Northern Rock? Why not let it go bust?

If a bank as high profile as Northern Rock went bankrupt it would create a huge loss of faith in the UK's financial sector, analysts said.

When Northern Rock went cap in hand to the Bank of England last September, it prompted the first run on a UK bank in more than 100 years ago.

Had the government let it collapse, then it could have sparked similar runs on other banks, which would ultimately have been very damaging for the UK economy.

In addition, Northern Rock is a key employer in the north east, with about 5,500 staff.

The bank could be taken under "temporary public ownership" if a private sale is not successful. What does this mean?

The chancellor has not used the word "nationalisation", but taking a company under public ownership is the same thing.

It means the government passes a law empowering it to take control of Northern Rock.

By the 1970s, about a quarter of the entire UK economy was under state control.

This was as a result of governments, both Labour and Conservative, deciding that key industries should be owned and supported by the public because of their importance to the labour market rather than their competitiveness.

At one stage, this list included British Leyland cars, British Airways, docks, shipbuilding, gas and electricity and the railway system.

Nationalisation has negative connotations for the Labour Party, which largely oversaw a decade of economic decline in the 1970s.

Why is Northern Rock in trouble?

Northern Rock is the fifth-biggest mortgage lender in the UK.

It has experienced phenomenal growth in the past few years and was considered a stock market darling as its share price grew, peaking at more than 12 last February.

The reason the bank, a big employer in Newcastle, could grow so fast was because of its unusual business model.

Most banks predominantly use savers' deposits to fund lending. But in order to expand its mortgage book, Northern Rock was borrowing short-term funds from the money markets to lend to home buyers.

This worked well when interest rates worldwide were low and borrowing charges were cheap.

But the global credit crisis hurt its ability to borrow in this way and it had to turn to the Bank of England last September for a lifeline or the bank would have had to declare itself bankrupt.

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