Northern Rock reveals removal of 100% savings guarantee

Savers taking advantage of Northern Rock's 100% protection guarantee scheme will see the limit lifted in 3 months.

The 100% savings guarantee was introduced in 2007 as the financial downturn began to take a grip on the financial sector, in an attempt to increase consumer confidence in the bank and attract more funds.

The guarantee, which was always intended as a temporary measure, will be removed on 24 May.

Those that currently hold bank accounts with Northern Rock will still benefit from the £50,000 guarantee offered to all banks operating under the Financial Services Authority (FSA) through the Financial Services Compensation Scheme (FSCS).

"The government's actions to stabilise Northern Rock protected the savings of millions of families and the jobs of thousands of workers," said the Financial Services Secretary, Lord Myners.

"The guarantee of retail deposits was a vital step that restored confidence in Northern Rock's operations when its customers were worried about its soundness."

Northern Rock collapsed in autumn 2007, which marked the onset of the banking crisis.

This forced the government to take a series of measures to ensure the public would not lose confidence in the bank, and other banks such as the Bradford & Bingley, which was also facing troubles.

On 1 January, Northern Rock was reorganised and split in two, one half for the savings accounts – know as Northern Rock PLC, and the other which holds most of the banks old mortgages, known Northern Rock Asset management.

The government has plans to sell Northern Rock PLC in order to recover some of the substantial amounts of public money into the bank to stop it from collapsing.

Those that currently hold fixed term bonds with the bank will continue to be covered by the government's 100% guarantee beyond 24 May until the bonds mature.

The 100% guarantee is no longer available to new or indeed existing customers, so only those that currently hold an account are covered for the next three months.

A spokesman for Northern Rock said the new move was a positive step for the bank.

"It reflects the good progress we have made and the strong capital position of the bank," he said.

Despite speculation amid the financial crisis, the government policy has always been to make sure that, regardless of any formal protection limits set by the FSCS, all UK savers would be guaranteed in full.

This was demonstrated not only with savers with the UK building society Bradford & Bingley, but also the Icelandic internet banks Icesave and Kaupthing Edge, which used market beating savings rates to attract hundreds of thousands of UK savers investing millions of pounds before going bust.

However, the formal 100% guarantee provided through Northern Rock allowed it to draw in billions of pounds from savers looking to protect their full investments, which in turn prompted a number of complaints from other building societies, branding the unlimited protection as 'unfair', as  competition from the Northern Rock, as well as the other state-backed savings body National Savings & Investments was too great.

The societies' having difficulties in attracting new funds have been very restricted on the amount they are able to lend in mortgages to home buyers.

Fiona Cornes of the Building Societies Association said she was happy with the government's decision to remove the 100% guarantee.

"It helps return the savings market to normality and we will be able to compete more fairly now with one of the nationalised banks," she said.

Written by Sam Gooch