Northern Rock panic subsides as savers learn money is safe

The panic surrounding the future of Northern Rock finally began to subside yesterday as savers took comfort from the Government's promise to underwrite the bank's entire £28bn savings book.

Queues formed outside just four of Northern Rock's 76 branches yesterday, while the bank's internet site saw half as many people logging in as the previous day – most of whom, the bank said, were successful at the first attempt.

Call centre volumes also fell to just 9 per cent of the numbers on Friday, Saturday and Monday. Furthermore, the bank claimed that 80 per cent of the calls were from people looking to put their money back into the bank, rather than asking to transfer it elsewhere.

The Newcastle-based bank has promised to refund all lost interest and charges incurred by savers who withdrew their money out of concern about the current situation, as long as they pay the money back into their accounts by 5 October. In Newcastle, The Journal newspaper appealed to its readers to get behind the bank, which is one of the North-east's largest benefactors.

The stock markets also reacted positively to the Government's pledge yesterday, with shares in all the banks rising, and the FTSE 100 closing up almost 100 points. Shares in Northern Rock bounced more than 8 per cent to close the day at 306p. However, they are still 75 per cent below the highs they hit earlier this year.

The Federal Reserve in the United States, meanwhile, cut interest rates for the first time in four years by an aggressive half point in a bid to prevent a steep housing slump and turbulent financial markets from triggering a recession.

Alliance & Leicester, which saw its share price dive more than 30 per cent in the last half an hour of trading on Monday – as rumours circulated that it was about to become the next victim of the credit crisis – recovered almost all of the previous day's losses, rising more than 32 per cent. Bradford & Bingley, whose shares also fell sharply on Monday, saw a 6 per cent bounce.

The Prime Minister, Gordon Brown, reiterated yesterday that the Government was doing everything in its power to bring the situation under control, while the Chancellor of the Exchequer, Alistair Darling, confirmed that the Treasury would be willing to extend its financial backing to any other British bank affected by the current turmoil in the credit markets.

"What we have offered to Northern Rock would be offered to any other bank that got into that difficulty, although, as I say, no other bank has approached the Bank of England," he said.

Mr Darling held talks with both the Bank of England and the Financial Services Authority to assess the current situation. One of the topics for discussion was an extension of the Financial Services Compensation Scheme, which is designed to protect savers in the event of a large financial institution going bust.

Currently, the FSCS only guarantees 100 per cent of the first £2,000 of any bank deposits, and 90 per cent of the next £33,000. Furthermore, it can take several months to pay out. The FSA's chief executive, Hector Sants, said the regulator would now look at the possibility of improving the scheme's protection, conceding that the run on Northern Rock may have been exacerbated by the compensation scheme's limitations. "Investors are aware of the limitations of the scheme, and in the light of events it would be right to look at it again," he said.

Business leaders applauded the Government's pledge to back Northern Rock. Richard Lambert, the head of the CBI, described it as a "bold and timely move" that should put an end to the current worries and help to restore confidence in the banking system. However, analysts warned that it was still too early to say what the repercussions of the credit crisis may be on the UK economy as a whole.

"The larger question going forward is whether there is a contagion effect to the wider economy," said Ted Scott, a fund manager for F&C Asset Management. "If the credit squeeze persists, corporates as well as individuals will be unable to borrow, which in turn will lead to a reduction in spending and investment."

How the crisis unfolded

5 September: Northern Rock tells Mervyn King, the Bank of England governor, that it is in serious trouble.

10 September: Talks with potential buyers for Northern Rock collapse, forcing it to approach the Bank of England, although the bank does not yet ask for financial help.

13 September: Alistair Darling, the Chancellor, says banks need to start lending more responsibly. Northern Rock applies to the Bank of England for emergency finance. The Bank is reportedly slow to respond at first. In a letter to the Commons Treasury Select Committee, Mr King rules out helping any financial institution. Later that night, Mr Darling authorises emergency funds for Northern Rock.

14 September: The Bank confirms it has agreed emergency funding. Panic hits the streets as thousands queue to withdraw money. Reports of cash withdrawals of £100,000 at a time. By the end of the day, £1bn is withdrawn and Northern Rock shares are down by 31 per cent.

15 September: The Financial Services Authority reiterates that it judges Northern Rock to be solvent and that savers can continue to deposit and withdraw funds.

16 September: Northern Rock drafts in extra staff to cope with calls as speculation mounts that the bank will be sold.

17 September: Northern Rock shares slide further and savers continue to queue. After the stock market has closed, the Chancellor says the Government will guarantee all customers' deposits.

18 September: Shares in Northern Rock close 6 per cent up as queues subside.