Northern Rock's 100% savings guarantee under review

Northern Rock has been split into a "good bank" and "bad bank"

The 100% guarantee of safety for savings in Northern Rock remains "under review" amid reports of an imminent decision of a shift in the status.

The Rock must give three months notice to customers when it decides to end the blanket guarantee and it insisted on Wednesday that a review was "ongoing".

Normally, only the first £50,000 of a saver's funds are guaranteed if a bank or building society goes bust.

The government has always given an implicit view that savings are safe.

Bank split

The 100% guarantee that all deposits with Northern Rock would be safe was given by Chancellor Alistair Darling at the height of the bank's troubles in October 2007.

The review has been ongoing for a number of weeks but no decision has been taken Northern Rock

During the subsequent financial crisis, when the future of many banks was at risk, there was a flight to safety by savers who moved their deposits from some banks and building societies to institutions with a blanket guarantee.

These included accounts run by Northern Rock and National Savings and Investments (NS&I), despite all indications that the government would not let any savers lose money.

The guarantee has remained in place for customers of Northern Rock, but a spokeswoman said that this was "never intended to be permanent".

At the start of 2010, the bank was split in two. The "good bank" - which is called Northern Rock plc and is expected to be sold off - holds all savings accounts amounting to about £19bn, organises new lending and holds £10bn of existing mortgages.

A second "bad bank", called Northern Rock (Asset Management) plc holds the majority of the mortgage book - about £50bn - and is set to repay outstanding government loans.

The split prompted the review by the Treasury of the blanket guarantee, and a number of reports on Wednesday suggested that a decision to end the status was imminent.

A Rock spokeswoman told the BBC: "The review has been ongoing for a number of weeks but no decision has been taken."

The final decision rests with the chancellor, and the Treasury said that the issue remained under review.

'Fair play'

One sector that would welcome an end to the blanket guarantee would be building societies which have suffered from a desertion by some savers.

The most recent figures showed that total balances at UK building societies reduced by £1bn in 2009, compared with an increase of £19bn in 2008.

This was due in part to low interest rates, but the Building Societies Association (BSA) also claimed that societies were not competing on a level playing field with the 100% guarantees distorting the savings market.

"The removal [of the Rock's 100% guarantee] in the very near future would be welcome," said a spokeswoman for the BSA.

"We feel the building societies sector is fast becoming the only one not directly subsidised by the state."

However, it remains to be seen whether savers would move their funds around institutions in the same way as they did during the fevered atmosphere at the height of financial crisis.

System of cover

In general, the Financial Services Compensation Scheme (FSCS) runs a scheme to guarantee the first £50,000 of savings per person per UK bank, building society or credit union. The cover for joint accounts is £100,000.

It charges a compulsory levy on the UK's financial services industry to cover compensation for savers if a UK bank were to go bust.

The system depends on bank authorisation, so different brands with the same bank sometimes have separate cover but sometimes do not.

For example, most brands under the banner of the Lloyds Banking Group have separate authorisation. However, Bradford and Bingley is now part of Abbey's authorisation - so up to £50,000 only will be covered for savers who have accounts with both Bradford and Bingley and Abbey.