Treasury lifts guarantee on Northern Rock deposits

The Treasury has lifted its guarantee protecting retail deposits with nationalised Northern Rock, a decision that marks a milestone in the bank's turnaround and draws a line under its troubles as it is prepared for sale.

The 100-percent guarantee, which has been under review since the start of the year, was initially introduced in September 2007 to stop a run on the bank, Britain's first major victim of the credit crunch.

Removing the guarantee will be a key test for any suitor eying Northern Rock, as buyers will be keen to check the stickiness of deposits without the government safety net.

"The guarantee of retail deposits was a vital step that restored confidence in Northern Rock's operations when its customers were worried about its soundness" Financial Services Secretary Paul Myners said. "Today's announcement shows how far we have come. Depositors can have confidence in Northern Rock."

Northern Rock welcomed a decision which it said returned it to a level playing field: "This is another positive step in the right direction and the decision reflects our good progress and the strong capital position of Northern Rock" Chief Executive Gary Hoffman said.

The Treasury confirmed on Wednesday there would be a three-month notice period for customers, with the special guarantee due to be lifted at close of business on May 24.

After that date, Northern Rock customers will be insured on the first 50,000 pounds they deposit - the same as customers at any other UK bank.

Earlier this year, the bank was officially split into a "good" bank - new mortgage and savings unit Northern Rock, which the government hopes to sell - and a "bad" bank, Northern Rock Asset Management, which includes existing mortgages and unsecured loans and could remain in government hands.