The special additional cover given to Northern Rock depositors is being withdrawn.

When Northern Rock became Northern Wreck in September 2007, the Treasury issued a statement saying that it would guarantee all the bank’s deposit accounts in being at midnight on19 September 2007. The guarantee covered future interest payments, movements of funds between accounts and new deposits into existing accounts. There were also provisions to guarantee accounts re-opened if they were closed during the panic period of 13-19 September 2007.

Nearly two and a half years on, the Treasury has announced that the guarantee is to come to an end. The move follows on from the break up at the beginning of this year of the old Northern Rock into two components:

• A ‘good bank’ – Northern Rock plc – which includes the old retail and wholesale deposit business (other than certain securitisation-related elements), some of the better-performing mortgages and its mortgage origination and servicing platform.
•  A ‘bad bank’ – Northern Rock (Asset Management) plc - which contains the rest of the mortgages, the Government loan and a variety of other borrowings, wholesale deposits and financial instruments.

Northern Rock plc is to be sold, while the taxpayer will hang onto the toxic pile which is Northern Rock (Asset Management) plc. The Treasury’s announcement on 24 February 2010 that it would end the deposit guarantee is part of the sale process. As previously promised, depositors have been given three months’ notice of the change.

Variable rate accounts will thus revert to FSCS protection from 24 May 2010. However, fixed rate accounts in place before the announcement will continue to benefit from the Treasury guarantee until the end of their term.

WEALTHFLOW COMMENT  

Northern Rock had undoubtedly benefitted from the Treasury guarantee. Without it, many of its larger depositors will be looking for new homes for their cash. They are likely to find better interest rates elsewhere, as Northern Rock’s ability to compete has been constrained by EU state aid rules.

Posted in Daily £££ Chatter | 1 Comment »