Decision time for savers over Northern Rock plan

UK consumers were today left to weigh up the pros and cons of putting their money into Northern Rock after the bank’s new chairman said it was “business as usual”.

People who decide to save with the group currently have the added security of the Government guarantee protecting their money.

But this guarantee can be withdraw at three months’ notice and it is likely that this will happen in the near future as the bank stabilises.

At the same time there is speculation that Northern Rock may be forced to reduce some of its current market-leading savings rates as a result of European Union rules on state aid.

Speaking at a press conference in Newcastle, Mr Sandler said the bank would have to operate according to Brussels' rules as long as it was a recipient of state aid.

He said these rules would put “restraints” on the bank, but added that “within these constraints we will compete vigorously”.

It is currently unclear what impact the rules will have on the rates the group is able to offer its savers and borrowers, with some commentators speculating that it will be forced to reduce them.

There are also likely to be complaints from other banks if they think Northern Rock has been given a competitive edge as a result of the Government guarantee and loan, and the British Bankers’ Association said it was currently reviewing the competition law.

James Invine, a research analyst at Dresdner Kleinwort, said: “Northern Rock will gain from Government ownership. No private bank can match the perception of deposit safety of a Government-owned bank.

“This means that Northern Rock’s battered deposit franchise has a competitive advantage, particularly over the smaller banks, Alliance & Leicester and Bradford & Bingley, where consumers may perceive slightly higher risk.”

But others felt less certain that the Government guarantee would attract savers.

Chris Gilchrist, director of Churchill Investments, said a lot of money had been withdrawn from the bank despite the Government guarantee.

He added that people who had less than £35,000 (€46,664) in savings were not offered any more protection by the Government guarantee than they already got from the Financial Services Compensation Scheme, which pays out 100% of the first £35,000 people lose if a bank goes under.

At the same time, he said, Northern Rock may not be able to continue to offer its current rates.

He said: “There are quite strong arguments from other banks that there is an element of subsidy. We suspect they will be forced to offer slightly less attractive rates.”

But Kevin Mountford, head of savings at moneysupermarket.com, said customers were unlikely to see much change in the short term and could even benefit from higher rates as the group looked to attract new business.

He said: “The new management team, headed by financial services stalwart Ron Sandler, will be keen to not only retain retail funds but attract more, so savers should keep a watching brief as we may well see some good rates offered in the coming months.”