LONDON, 18 September 2007 — Concerned depositors of Northern Rock, the troubled British bank, resumed withdrawing their money yesterday at branches throughout the country for a third day as British Chancellor of the Exchequer Alistair Darling appealed for calm and reiterated that the bank was solvent and that savers could withdraw their money without any problems.

“If people want to get their money out of Northern Rock bank, they can do it,” the chancellor told the Today program on BBC radio. “The money is there and it is backed by the Bank of England so they can get it. I think the main thing we must keep sight of is that Northern Rock clearly has problems and they need to be resolved, they will be resolved. But fundamentally if we look at the prospects of our economy, it is strong, we’ve got historically low interest rates and there is every reason to believe that just as we’ve dealt with problems in the past, we will deal with this particular problem.”

In a move to further calm the City when shares of financial institutions especially banks fell sharply yesterday, the chancellor expressed confidence that the British economy is strong to weather the crisis.

Northern Rock CEO Adam Applegarth put on a brave face yesterday saying that it was “business as usual” at the bank. He reiterated that Northern Rock would continue as an independent financial institution for the foreseeable future.

Some depositors, following the assurances from the government, have actually started to put new deposits with the bank. However, the scale of the bank’s problems cannot be underestimated. By mid-afternoon yesterday, Northern Rock’s shares on the London Stock Exchange fell from 438 pence to 291 pence. Shares in fellow mortgage banks such as Alliance & Leicester and Bradford & Bingley also suffered.

Northern Rock fell victim to a global credit squeeze precipitated by dodgy investments in the US subprime mortgage market. It had to be bailed out by the Bank of England with an emergency facility to cover its deposits. Normally Northern Rock would have no difficulty borrowing from the interbank money markets, but in present circumstances, commercial banks are nervous about lending. As a result, Northern Rock has struggled to raise money to finance its lending.

British premier Gordon Brown and his chancellor met US Treasury Secretary Hank Paulson late yesterday to discuss the growing turmoil in world financial markets.

Former chairman of the United States Federal Reserve Alan Greenspan, in an interview with the Daily Telegraph yesterday, warned that Britain is more vulnerable to the credit crunch than the United States and Japan, because of the predominance of variable rate mortgages, thus making British households more subject to interest rate changes. He also warned that the country’s house price boom was unsustainable. Central banks rushed to pump in liquidity and to decrease interest rates to help stabilize the markets, as banks worldwide face a credit crunch, primarily because banks are reluctant to lend to each other.

This is a classic run on a bank, this time Northern Rock, the Newcastle-based mortgage lender, which has some 24 billion pounds in deposits. Savers have withdrawn two billion pounds - which represents about 8 percent of the total deposits, much less than the mortgage lender and the Bank of England and Financial Services Authority had feared.

Northern Rock was almost sold to rival bank Lloyds TSB. But the deal fell through because of the current credit crunch.

However, prospects for a potential takeover bid of Northern Rock have been boosted after the Bank of England stressed that the emergency lending facility to the mortgage lender would be transferred to any new owner.

Banking sources stressed that there are two serious potential bidders. But they are waiting for the troubled bank to hit rock bottom, before making a bid.

Moreover, doubts remained about the expiry date of the facility and if there is any guarantee that it would be extended for the new owner. The mortgage book business of Northern Rock is a massive 100 billion pounds. As such bidding banks would be reluctant to take on a balance sheet of Northern Rock’s size especially when in a global credit crunch environment. One way of mitigating the risks is to bundle the mortgage business into smaller chunks and distributing them among other lenders.