Bank's Strife May Shake UK Confidence

An elderly customer, rests his head in his hand, as he waits in a queue outside a branch of the Northern Rock the British mortage lender in Harrow, London Monday Sept. 17, 2007. Shares of British mortgage lender Northern Rock PLC, hit by a liquidity crisis which sent customers lining up to withdraw billions in deposits, tumbled more than 30 percent Monday. (AP Photo/Max Nash) (Max Nash - AP)

LONDON -- Britain attempted Monday to contain a run on the country's fifth largest mortgage lender amid fears that a sustained panic could damage the national economy should it further undermine the confidence of investors and consumers.

Treasury Chief Alistair Darling said the British government will guarantee all existing deposits at troubled bank, Northern Rock PLC.

"I do recognize that people are concerned, that's why we have put the matter beyond all doubt," Darling said at a Downing Street news conference after a meeting with U.S. Treasury Secretary Henry Paulson.

Deposits "are safe and are guaranteed, that's unequivocal," he added as he sought to end the panic. "People can continue to take their money out of the Northern Rock bank, but if they choose to leave their money in the bank it will be guaranteed safe and secure."

Even as Darling spoke, customers stood in lines outside of bank branches around Britain to withdraw all or some of their deposits. Spooked consumers have removed 2 billion pounds ($4 billion) since early Friday, when Northern Rock revealed that it had asked the central bank for emergency funds and warned that its profits would take a big hit.

Scenes of nervous depositors, broadcast nationwide, appeared to stoke further apprehension.

"Extensive news coverage of people queuing up to withdraw their savings from Northern Rock could well fuel the fears that other financial institutions will be affected and increase general concern about the economic outlook," said Howard Archer, chief U.K. economist with Global Insight.

Archer said that if Northern Rock's problems are not sorted out quickly, they could "have a significant dampening impact on both consumer and business confidence."

The surprise and rapidity of Northern Rock PLC's plight have raised questions about how the potential impact of the collapse of the U.S. subprime mortgage market on Britain was so underrated.

Northern Rock shares tumbled more than 35 percent to 282.75 pence ($5.68) after initially being suspended on Monday, extending losses of a similar magnitude on Friday.

Analysts said the panic by both investors and depositors has made it almost certain that Northern Rock will be sold.

"The images of customers queuing up in the high street has done irreparable damage to the franchise," said Nic Clarke, an analyst for Charles Stanley & Co., suggesting that a buyer would have to move quickly to save the bank's reputation.