Northern Rock scramble

The turmoil in global banking hit the streets of Britain on Friday as thousands of Northern Rock customers queued up to withdraw their savings from the UK mortgage lender after it was rescued by the Bank of England.

As regulators and politicians called for calm, Northern Rock – Britain’s fifth-biggest mortgage lender – scrambled to contain the fallout after it became the first British bank in decades to be bailed out by regulators. One person close to the situation said customers had withdrawn about $2bn Friday but Northern Rock declined to comment on the figure, which would amount to 4 per cent of its deposit base.

The rescue demonstrates the risks from a decade of financial innovation in the capital markets, which allowed a small regional lender to wield financial clout far greater than its network of 76 branches would suggest.

It also shows how the turmoil in the financial system that resulted from excessive lending to Americans with patchy credit histories triggered the failure of a bank with no direct links to the US mortgage market.

Shares in Northern Rock plunged more than 30 per cent as analysts slashed their earnings forecasts for the bank. The news also dragged down share prices for other UK banks such as Alliance & Leicester, HBOS and Barclays.

The FTSE 100 saw sharp falls until US markets opened and helped soften the bearish tone. As the day wore on, sentiment soured again. The list of leading UK shares ended 74.6 points lower, almost 1.2 per cent down at 6,289.3. The FTSE Eurofirst 300 was 16.2 points lower at 1508.1, 1.1 per cent down.

In the US, equity markets pared early losses after economic data showed retail sales, excluding sales of vehicles, fell sharply in August. The data cemented investors’ expectations of at least a quarter-point interest rate cut from the Federal Reserve when policymakers meet on Tuesday.

The commerce department reported retail sales fell 0.4 per cent in August, excluding vehicle sales, compared with forecasts of a 0.1 per cent rise, and a 0.7 per cent increase in retail sales in July. The S&P500 was down 0.1 per cent to 1,482.45 by midday in New York. The Dow Jones Industrial Average of blue-chip stocks fell 0.01 per cent to 13,423.66.

Financials were among the worst performers, after Merrill Lynch, the world’s largest brokerage, warned that shaky credit markets had forced it to adjust the value of securities linked to risky subprime mortgages.

Concern over Northern Rock and the ability of UK banks to maintain new mortgage lending at attractive rates added to concerns about the housing market and the economy in general.

Under the terms of the bail-out, the Bank of England will provide an open-ended facility to Northern Rock, allowing it to access liquidity by posting mortgages or mortgage-backed securities as collateral. The rescue – finalised yesterday after days of negotiations involving the Financial Services Authority and the UK Treasury – came just two days after Mervyn King, governor of the Bank, insisted it would not intervene to bail out the markets.

According to people familiar with the matter, several banks considered buying Northern Rock. However, a deal was undermined by a shortage of liquidity and uncertainty about Northern Rock’s value. Adam Applegarth, Northern Rock’s chief executive, said the bank was not in talks with a buyer.