Northern Rock crisis forces government to make unprecedented fund guarantees

Filed Under Finance

I wonder if the the news that the government is willing to guarantee all the deposits at Northern Rock is about helping the stricken bank out or about stopping the rot spreading throughout the UK banking system.

With shares in Alliance and Leicester being badly hit in the last half hour of trading - they slumped 31 percent today - there must be concern in government circles that that bank could be next in line for a crisis of confidence and a mass withdrawal of funds.

So in the few hours after trading today, the Bank of England has acted to guarantee that all monies deposited at Northern Rock will be completely safe. Presumably they were dreading the impact on the banking system tomorrow if they failed to act today.

Two banks collapsing would be horrific for the financial system, in which confidence and stability underpin most activities.

Whilst I think that the government has made some terrible mistakes in recent months - and Gordon Brown cannot shed the blame for this - at least there is now an unprecedented guarantee in place. Lets hope that this stops the current crisis of confidence in the banking system turning into an unparalleled disaster.