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Britain tries to head off bank run

September 18, 2007|From the Associated Press

LONDON — Britain attempted Monday to contain a run on the country's fifth-largest mortgage lender amid fears that a sustained panic could damage the national economy should it further undermine the confidence of investors and consumers.

Treasury Chief Alistair Darling said the British government would guarantee all existing deposits at Northern Rock, a bank in northern England that said it couldn't get short-term loans because of the global credit crunch stemming from the U.S. sub-prime mortgage meltdown.

Spooked depositors have removed $4 billion, or about 8% of the bank's total, since early Friday, when Northern Rock revealed that it had asked the central bank for emergency funds and warned that its profit would take a big hit.

"I do recognize that people are concerned, that's why we have put the matter beyond all doubt," Darling said after a meeting with U.S. Treasury Secretary Henry M. Paulson Jr.

Deposits "are safe and are guaranteed, that's unequivocal," Darling added. "People can continue to take their money out of the Northern Rock bank, but if they choose to leave their money in the bank it will be guaranteed safe and secure."

As Darling spoke, customers stood in lines outside of bank branches around Britain to withdraw all or some of their money.

"Extensive news coverage of people queuing up to withdraw their savings from Northern Rock could well fuel the fears that other financial institutions will be affected and increase general concern about the economic outlook," said Howard Archer, chief British economist with Global Insight.

Archer said that if Northern Rock's problems were not sorted out quickly, they could "have a significant dampening impact on both consumer and business confidence."

Northern Rock shares plunged more than 35% on Monday after trading in them was temporarily suspended earlier in the day. The stock tumbled more than 30% on Friday.

Despite reassurances from Darling that Britain's banking system was in good shape, shares in other mortgage providers also sank Monday, dragging down the broader market.

The London stock market's FTSE-100 index tumbled 106.50 points, or 1.7%, to 6,182.80, after sliding 1.2% on Friday.

The British pound, which in July hit a 26-year high against the dollar of $2.063, fell for a fourth straight session, ending at $1.994 versus $2.01 on Friday.

Analysts said the panic had made it almost certain that Northern Rock would be sold.

Northern Rock was susceptible to the credit squeeze because it relied on the wholesale markets for 75% of its funding.

Though the bank made loans mostly to people with good credit, investors interested in mortgage-backed securities have grown scarce.

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