Northern Rock: the madness of crowds

Savers have far fewer worries than the directors of the bank which may now be taken over, says martin vander weyer

Your money's safe with Northern Rock," say the Bank of England, the Chancellor and the Financial Services Authority (FSA). They ought to know: the FSA, as banking regulator, should spot any black holes in Britain's fastest-growing mortgage lender; the Bank has offered funding to help it weather the current storm; and Chancellor Alistair Darling assures us the economy remains fundamentally strong.

Yet depositors are queuing round the block to get their money out. Are they right to do so before the Rock crumbles, or is this that well-known phenomenon of markets - the madness of crowds?

I'd say depositors can sleep more soundly tonight than directors of Northern Rock. Barring total meltdown - which no one is predicting - your money's safe because the authorities cannot allow a major high street

Northern Rock’s tumbling share price makes a takeover all the more feasible

lender to fail, with the ramifications that would have for the banking system and economic confidence.

So if Northern Rock can't dig itself out of trouble, it will swiftly be persuaded to accept takeover by a stronger bank. Its tumbling share price makes that all the more feasible.

But why the panic anyway? Northern Rock isn't facing catastrophic losses due to bad loans: it's not a player in the collapsing US 'sub-prime' market. All it did to provoke this crisis was say that it would make less profit this year than it first hoped.

But three-quarters of the money it needs to fund its mortgage portfolio comes not from small depositors but from other banks and investors in wholesale money markets. In response to sub-prime troubles, as rumour feeds upon rumour, that market has shrivelled: hence the need for emergency cash from the Bank of England.

In short, the strategy that has enabled Northern Rock to grow so fast suddenly looks shot to pieces. Depositors should not lose a penny as a result, but the Rock itself may lose its independence.