Northern Rock's nationalisation - what it means for you

Northern Rock savers and borrowers are probably rather confused about what will happen to their accounts now that the ailing mortgage lender has been taken into public ownership.

This is hardly surprising given the conflicting public messages that have been issued by the various parties.

Ron Sandler, the City trouble-shooter responsible for the rescue of Lloyd's of London when it faced collapse in the 1990s after a decade of crippling claims, has been brought into Northern Rock to run it on behalf of the Government. He says the bank will "compete vigorously" in future.

At the same time, presuming the nationalisation goes through as expected, deposits at Northern Rock will, like National Savings & Investments' deposits, be 100% guaranteed by the Government. This is in sharp contrast to savings in other banks and building societies, where only the first £35,000 is guaranteed to be secure under the Financial Services Compensation Scheme.

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In the run-up to nationalisation the Government has already pledged to back Northern Rock deposits up to 100% and has said it will give at least three months' notice of any plan to remove guarantees.

However, it is not clear how the Treasury could ever remove or limit these guarantees as long as the Government is the bank's owner, backing it with Government money.

Meanwhile, other bank and building society leaders are crying foul and threatening legal action if Northern Rock is able to offer preferential savings and lending terms because it is now not only backed up with £100bn Government money but is now actually going to be owned by the British Government.

Adrian Coles, director general of the Building Societies Association, said on Monday: "It is crucial that we do not have a taxpayer-funded institution competing for retail deposits with institutions that have not failed or needed government support."

The Chancellor, Alistair Darling, replied: "I am aware of the banks' concerns and I want to be fair by them. But I think they also recognise that we have got to have a situation where Northern Rock can continue to trade."

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In short, Northern Rock is the now the safest bank in the UK, offering some of the best savings rates. But can this last?

21 February 2008 © Moneyextra.com

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