What is nationalisation?

Nationalisation means the Government taking a business from its current shareholders into public ownership. The vast majority of businesses have moved the other way from public to private hands under recent Conservative and Labour governments.

What happens now?

Emergency legislation will be rushed through Parliament. A Government-appointed arbitration panel will decide on a fair level of compensation for Northern Rock’s shareholders when the move is made, although this is likely to pave the way for a legal fight if investors are unhappy with what is offered.

But surely civil servants don’t know how to run a bank?

The Treasury won’t be bussing coach-loads of officials up to Northern Rock’s headquarters in Newcastle upon Tyne to take over the running of the mortgage lender. The business will be publicly-owned but run at arm’s length by a new management team. Former Lloyd’s of London chief executive Ron Sandler will take over as executive chairman.

How long will the bank be nationalised for?

Nationalisation is a drastic and embarrassing move for the Government and it will want to get the bank off its hands as quickly as possible. Bank of England Governor Mervyn King has said if nationalisation occurred Northern Rock was likely to “pass very quickly to a new management team and, ultimately, to a new ownership team”. But most of Rolls-Royce was in public ownership for 16 years after the bank carried out an emergency nationalisation in 1971.

I’m a saver. Will anything happen to my money?

The Government has already stepped in to guarantee savers’ deposits - it was forced to make the move to stop the run on the lender. For other banks, the Financial Services Compensation Scheme (FSCS) currently 100 per cent guarantees only the first £35,000 of savings - so technically the money is actually safer with Northern Rock.

Will I be able to get my money straightaway?

Yes. The day-to-day running of the business will continue as normal. This is why nationalisation is a better option than administration, where savers’ deposits would be frozen while a sell-off of the bank’s mortgage assets to get the best deal for creditors is carried out.

What happens if I have a mortgage with Northern Rock?

You should continue to pay the mortgage in the normal way, although if you fall behind on your payments and are repossessed, your house would be ultimately owned by the Government.

How did Northern Rock get into this mess?

The company fuelled its growth by borrowing most of its cash for mortgage lending in money markets - relying relatively little on savers’ deposits. In the summer credit crunch, markets were gripped by fears over potential losses on bonds based on high-risk US mortgages. Banks keen to hoard cash would only lend to each other at higher rates - and Northern Rock’s borrowing costs rocketed.

Northern Rock also raised funds by parcelling up its mortgage debts and selling them on in a process called securitisation. But in the panic over the US situation, investors were turning away from what were now considered risky investments. With the funding taps turned off, the firm was forced to turn to the Bank of England for an emergency bail out in September, sparking the UK’s first bank run for nearly 150 years.

What happens to shareholders once the bank is nationalised?

Investors will be offered compensation for their shares set by a Government-appointed arbitration panel which decides on a fair price. But shareholders, including two hedge funds, could launch legal action if they are unhappy with the amount offered. Shares in the company are trading at less than 100p although the two hedge funds have reportedly written to the Treasury calling for 400p a share in compensation.

How much have shareholders lost?

In February last year, shares in Northern Rock peaked at £12.51p - giving the company a stock market value of nearly £5.3 billion. Since the crisis, shares have plummeted to stand at 90p on Friday - valuing the firm at £375 million.

How much does Northern Rock owe?

Since September, the Newcastle-based lender has borrowed an estimated £25 billion from the Bank of England.

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