Question

The factors that led to the crisis in Northern Rock whether have been effectively solve? Explain. (at least 200 words)

Answer 1

The Northern Rock crisis explained

Pictures of dozens of people queuing outside branches of Northern Rock were an unnerving sight - not just for its customers, but for anyone with a few thousand pounds or more hiding away in a deposit account.

Why all the fuss?

Northern Rock had to ask the Bank of England for emergency funding to help continue to operate.

Despite frequent reassurances from the great and the good in the City, including the Financial Services Authority, tens of thousands of people have rushed to withdraw their hard-earned savings, fearing the bank will collapse.

I have money with Northern Rock. Should I be worried?

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The FSA has put itself on the line on this one. It has publicly stated that Northern Rock is a good-quality company that exceeds its capital requirements.

This is not a solvency issue -this is a liquidity issue, the regulator has insisted time after time in the past couple of days.

These words should be of some comfort to worried Northern Rock savers but if you have a sizeable amount of money in one of its accounts you would do well to check whether or not you could get a better rate elsewhere.

The chances are you could and there are some cracking rates - as high as 7 per cent - available on the high street.

Will the Northern Rock crisis deepen and spread to other banks?

Northern Rock admits that it "cannot gaze into a crystal ball" on what the future may bring, and that the Bank of England's handout is a short-term measure.

But it is highly unlikely that there will be a full-blown banking crisis - the FSA, the Bank of England and the Government will do everything in their powers to prevent such a catastrophic event from ever happening.

Lenders such as Paragon, Alliance & Leicester and the Bradford & Bingley have all denied that they have any problems with liquidity.

The Chancellor, Alistair Darling, has also said that only Northern Rock has asked for assistance from the Bank of England so far.

I don't bank with Northern Rock. Does this mean I have nothing to worry about?

Not necessarily. The ramifications of the credit crunch, which is the root of Northern Rock's problems, are being felt across the mortgage market.

The costs of new mortgages and personal loans are likely to continue to rise - last week several lenders, including Abbey and Halifax, raised rates on their new variable-rate mortgages.

This will affect property-buyers and those about to remortgage. However, if you are already tied into a deal, you have nothing to worry about yet, you will escape the current turmoil on the home-loan market.

The estimated 250,000 homeowners whose fixed-rate mortgage ends in the next three months should act immediately; there's nothing wrong with sorting and agreeing your mortgage now, even if you don't need it until December, says Martin Lewis, at MoneySavingExpert.com

What action can I take?

The economic climate has changed - the days of easy credit and bargain-basement interest rates are over, for now at least. It is as good as time as any to review your finances.

For starters, think carefully before taking any more debt.

If you are due to come off a fixed-rate deal within the next year you may want to have a contingency plan in place in case rates remain at today's levels or even higher.

It may also be worth checking your credit history. Lenders are tightening their lending criteria, so even a missed mobile phone payment could affect your credit rating and the opportunity to get the best deals on the market.

Finally, it is always worth having a nest egg to fall back on, so take advantage of the high savings rates and build up a rainy-day fund.