Northern Rock – should you withdraw your money?
September 15th, 2007 | 
Author: When a bank announces that it has a problem, the first reaction of just about everyone is to take out their money and put it somewhere else, but should you do that?
You’ll probably have heard that there’s “no problem” and that the Bank of England won’t let any bank go bust. Well, as it happens they most definitely have let banks go bust in the past. Not terribly often, granted, and the last time was with BCCI way back in 1991 in somewhat different circumstances but you certainly can’t rely on statements by various people who say that the BoE would never let a bank go bust because they are wrong: it has. More recently, Equitable Life has also been allowed to, in effect, go bankrupt.
If you’ve got a large chunk of your life savings in the Northern Rock you’d be crazy to rely on people just assuming that the Bank of England won’t let them go bankrupt. If you couldn’t do without that money, take it out.
Won’t that make life more difficult for Northern Rock? Yes, it certainly will. However, even if everything works out, chances are that within the next few days you will find that the conditions on your instant access account have been changed so that you need to give them notice to withdraw the money. Do you really want to take the chance that things won’t “work out”?
What should be learnt for this lesson is that you should NEVER keep all your money with one financial institution no matter how good their reputation (and don’t forget that the reputation of Northern Rock was very, very good). The maximum payout should things go really badly wrong is £18,000 £31,700 (100% of your first £2,000, 90% of the next £33,000).
What’s really likely to happen?
Last time this kind of thing happened was in 1991 with the Town & Country Building Society (the 15th largest society in the country at the time) which was subsequently taken over by the Woolwich (now part of Barclays Bank) in a rescue operation. Something similar seems likely to happen in this case too although it’s more complicated in some ways as the Northern Rock is a listed company rather than being a mutually owned building society.
Copyright © 2004-2014 by Foreign Perspectives. All rights reserved.
Posted in Banking
3 Responses to “Northern Rock – should you withdraw your money?”
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Northern Rock – should you withdraw your money?
When a bank announces that it has a problem, the first reaction of just about everyone is to take out their money and put it somewhere else, but should you do that?
You’ll probably have heard that there’s “no problem” and that the Bank of England won’t let any bank go bust. Well, as it happens they most definitely have let banks go bust in the past. Not terribly often, granted, and the last time was with BCCI way back in 1991 in somewhat different circumstances but you certainly can’t rely on statements by various people who say that the BoE would never let a bank go bust because they are wrong: it has. More recently, Equitable Life has also been allowed to, in effect, go bankrupt.
If you’ve got a large chunk of your life savings in the Northern Rock you’d be crazy to rely on people just assuming that the Bank of England won’t let them go bankrupt. If you couldn’t do without that money, take it out.
Won’t that make life more difficult for Northern Rock? Yes, it certainly will. However, even if everything works out, chances are that within the next few days you will find that the conditions on your instant access account have been changed so that you need to give them notice to withdraw the money. Do you really want to take the chance that things won’t “work out”?
What should be learnt for this lesson is that you should NEVER keep all your money with one financial institution no matter how good their reputation (and don’t forget that the reputation of Northern Rock was very, very good). The maximum payout should things go really badly wrong is £18,000 £31,700 (100% of your first £2,000, 90% of the next £33,000).
What’s really likely to happen?
Last time this kind of thing happened was in 1991 with the Town & Country Building Society (the 15th largest society in the country at the time) which was subsequently taken over by the Woolwich (now part of Barclays Bank) in a rescue operation. Something similar seems likely to happen in this case too although it’s more complicated in some ways as the Northern Rock is a listed company rather than being a mutually owned building society.
Copyright © 2004-2014 by Foreign Perspectives. All rights reserved.
Posted in Society
You are guaranteed 100% of the first £2,000 and 90% of the next £33,000 by the government. Of course if Northern Rock goes bankrupt (a major possibility) you’ll be asking for your money back, along with millions of other savers. You won’t see a penny for months (or possibly over a year) and will lose the interest you’d have gained if you’d transferred your money on Monday. The price you’ll pay is maybe a few tenths of a percent in interest. What price is peace of mind?
Arnold, my understanding was that the protection offered by the FSA to UK savers was 100% of the first £2,000 and 90% of the next £33,000 you had with any one financial institution. Therefore if you had £35,000 with an institution which went bust you would receive £31,700 ie you would lose £3,300 – 10% of £33,000.
http://www.fscs.org.uk/consumer/key_facts/limitations_of_the_scheme/compensation_limits/
Therefore to protect yourself don’t keep more than £33,000 with any one institution but remember about interest being added so safer to keep to around £30,000.
It is a very worrying time as the queues at the Northern Rock remind you of the crash of the 1920s.
Quite right with the higher limits Justin.. shows how long ago it’s been since it last mattered to me.
As you say, there is no interest paid even on the £30k and it would almost certainly be getting on for a year were the scheme have to be operated for the Northern Rock given the sheer numbers of people that would be involved. It certainly makes you wonder whether all those people putting their savings into the likes of ICICI will have a think about just how secure those savings might be in an Indian bank.
Whilst ’tis true enough that you’ll “only” lose a maximum of £3k, a lot of people are chasing higher rate accounts for a difference of under 1% therefore just one bankruptcy would take you 10 years to recover from in terms of the interest. What’s really crazy though is that there are people who’ll put £1 million into a single institution and not consider that, no matter how safe, that institution could go to the wall. I’ll bet that the guy locking in the bank manager now wishes that he’d plonked his cash in the Bank of England (which is what you’re effectively doing when you put money in National Savings accounts). OK, he’d only have been getting 5.15% vs 6.31% but it’s going to take him a very, very long time to make up the £970,000 if NR does go to the wall.
I just wonder if he’s been daft enough to put the whole million in one of other top paying accounts… Bradford & Bingley perhaps?
What’s really interesting though is that the only interest rate advantage was all of 1.16% for a totally secure account (ie National Savings) vs a seemingly secure one.
It’s not nearly so bad as the 20’s. Then every bank had a queue. Back in 1991 it was only Town & Country Building Society and even then it was only for a matter of days before the deal was worked out with the Woolwich to take them over.