Helping Northern Rock from going south

Customers line up at Northern Rock branch in Bromley, southeast London

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KAI RYSSDAL: Northern Rock is one of the U.K.'s biggest mortgage companies. Not quite Countrywide big but good-sized. Today, though, its foundations proved to be somewhat less sturdy than its name implies. The Bank of England stepped in with an offer of emergency credit -- the first time that's happened to a bank there in more than 30 years. And just the latest sign the global liquidity squeeze might not be so contained after all. From London, Marketplace's Stephen Beard reports.


Stephen Beard: Don't panic! was the message from the British government today. But Northern Rock's investors and customers weren't listening. The company's share price fell by a third and depositors besieged Northern Rock branches.

Man 1: I'm feeling like extracting my money from these premises. That's what I'm feeling. That's why I'm here.

Man 2: This is the sort of thing that happened in Germany in the 1920's. You don't expect to see this happening in London in this allegedly well-regulated financial system here. It is disgraceful.

The U.K. finance chief Alistair Darling insisted there is no problem with the banking system. And Northern Rock isn't bust, he said. It's just experiencing a little difficulty raising funds. He blamed it all on the U.S.

Alistair DARLING: All this stems from the problems in the American housing market. What's happened is there is plenty of money in the system. The banks have got money, but at the moment they are not lending to each other in the way they usually do.

The credit markets where complex debt packages are traded, and where Northern Rock does most of its borrowing, have been paralysed by the U.S. subprime liquidity crisis. But, says opposition politician Vince Cable, Northern Rock is not an innocent victim.

Vince CABLE: They have been lending multiples of people's income well in excess of what you'd normally regard as prudent, engaging in quite a lot of very marginal lending in order to increase their market share. Of course all the British banks have been doing that.

More of them are expected to follow Northern Rock and go begging for help from the central bank. Earlier this week the U.K.'s finance chief called for a return to old-fashioned banking, with lenders and borrowers dealing directly with each other again. Instead, today he got an old-fashioned run on a bank and the first clear sign the credit crunch could soon affect Britain's real economy.

In London, this is Stephen Beard for Marketplace.

About the author

Stephen Beard is the European bureau chief and provides daily coverage of Europe’s business and economic developments for the entire Marketplace portfolio.

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