Northern Rock: questions and answers

Will it work?
It should. There is now absolutely no reason for any rational saver to worry about losing money deposited with Northern Rock. The savings do not just have the Bank of England behind them, they are now effectively underwritten by UK plc as a whole. No other savers in commercial banking history have had such castiron guarantees that they will get their money back. But these are not rational times.

Where will the money come from?
Ultimately, if Northern Rock goes under and the Government has to find some or all of the £21 billion still owed to savers, there is only one source - the taxpayer. It is unlikely that it will get to that stage but if it does, the bail-out will have enormous consequences for the national finances and destroy Gordon Brown's hard-won reputation for "prudence" at a stroke.
It will be seen as Labour's version of John Major's nemesis - the ERM crisis - which, spookily, happened almost exactly 15 years ago to the day and put the Tories out of power for a generation. The stakes are enormously high.

What will happen to the Northern Rock now?
Most commentators agree that the company's brand is damaged beyond all repair. The best hope is that once the dust has settled a buyer can be found and an orderly transfer completed. The Treasury has made it clear that the emergency funding announced by the Bank of England on Friday will transfer with the Northern Rock to the new owner. However, until the scale of the savings withdrawals becomes clear it is unlikely any bank board will want to take the risk. In the meantime Northern Rock is like a dismasted sailing ship, totally at the mercy of the storms in the financial markets.

How vulnerable are the other banks?
Alliance & Leicester shares came under attack in an extraordinary wave of panic selling towards
the end of Stock Market trading yesterday. The bank insists that it does not have the same problems as Northern Rock but the drama revealed just how fragile confidence is. The one piece of good news is that the crisis has come at a time when the global economy and the British banking system are generally in robust good health. A decade of unbroken growth means the economy is far better placed to ride out the financial crisis than it was after Black Wednesday in 1992 or during the Secondary Banking Crisis in 1974.