The Government made an unprecedented intervention in the Northern Rock crisis yesterday by publicly guaranteeing all the bank's deposits.
The intervention, by the Chancellor, Alistair Darling, capped a dramatic day that had seen further mass queuing outside Northern Rock branches and billions wiped off banks' shares on fears of contagion.
The worst hit of the other banks was Alliance & Leicester, which tried to stem fears that it would be the next bank to seek emergency funding. Bradford & Bingley was another to feel the pain.
The slump in Alliance & Leicester's shares raised fears of its customers making mass withdrawals of their savings in a second run on a British bank, and the Leicester-based mortgage lender had to act quickly.
But it was the Northern Rock crisis that continued to cause the most concern. The bank's shares fell by 35.4 per cent, and mass withdrawals continued, bringing the total withdrawn in the past week to £2bn.
In an attempt to calm the panic, Alistair Darling, the Chancellor of the Exchequer, said: "Should it be necessary, we, with the Bank of England, would put in place arrangements to guarantee all the existing deposits in Northern Rock during the current instability. This means people can continue to take their money out of Northern Rock but if they choose to leave their money in Northern Rock it will be guaranteed safe and secure."
Mr Darling said that if forced to, the Government would use Northern Rock's assets to fund the deposits. City analysts said that would be tantamount to nationalising the bank.
The Treasury said the Government could provide backing for other lenders if necessary, depending on their financial situation.
Before Mr Darling's statement, thousands of people had continued to queue outside Northern Rock branches and bombard the bank's website to get their money out, causing fears the Newcastle-based bank would be unable to continue trading. About £2bn of the bank's £24bn of deposits was taken out before yesterday with another £1bn likely to have been taken out yesterday.
Geoffrey Wood, economics professor at Cass Business School, said: "What Mr Darling is doing is a good idea. If there is any criticism it would be that he should have done this earlier."
Professor Wood said Mr Darling's action was without precedent because the last time there was a financial crisis of this scale was in 1866.
Mr Darling has been trying since Friday to reassure savers that Northern Rock was solvent and had the backing of the Bank of England. But with no sign of a let-up in withdrawals from Northern Rock he was forced to offer the full guarantee.
Alliance & Leicester was forced to make a statement yesterday after its shares plunged by nearly a third and Bradford & Bingley shares also fell heavily. With relatively few depositors, both banks use the money markets to fund their lending, sparking fears they could face similar problems to Northern Rock.
Alliance & Leicester said it knew of no reason for its shares to fall and that if its business was badly affected it would make an announcement to the Stock Exchange. The share plunge slashed Alliance & amp; Leicester's market value by £1.2bn. Mr Darling said no other bank had gone to the Bank of England for emergency funding.
The Government and the Bank of England have been under increasing pressure over the crisis at Northern Rock. Bankers and economists have criticised the Bank of England's hardline stance on not providing support for financial institutions, and opposition MPs have tried to pin the blame on the Prime Minister for his stewardship of the economy as Chancellor.
No one will lose out, vow ministers
Fears that a crisis would spread throughout the financial system were behind the Government's dramatic intervention to guarantee Northern Rock customers they would not lose a penny. By mid-afternoon yesterday, Gordon Brown and his Chancellor, Alistair Darling, agreed that more clarity and certainty was needed to prevent the problems at Northern Rock afflicting other banks and building societies.
Discussions were under way before the collapse of Alliance & Leicester's share price but that underlined the need for urgent action. Privately, ministers hope the Government's move will make it easier for Northern Rock to be taken over, bringing a worrying chapter to an end. There were frantic behind-the-scenes negotiations yesterday involving the Treasury, the Bank of England and Financial Services Authority, of which the Prime Minister was kept fully informed.
Ministers insisted that their goal was to restore confidence in the financial system. But they knew that if a contagion spread through the system, the Government might struggle to escape the blame. It could have been a financial equivalent of foot-and-mouth disease or even Labour's Black Wednesday.
Ministers say Britain has weathered other storms since Labour came to power in 1997 and will survive this one. But they will be watching anxiously this morning to see whether the queues outside Northern Rock branches have gone away.