NORTHERN ROCK is within days of being forced to stop taking savings from new customers after a rush of deposits into the nationalised bank.

More than £1 billion of savings has flooded into it in the past two weeks, following the continuing chaos that has engulfed the banking sector. The government guarantees underpinning Northern Rock have been encouraging savers to move their cash.

The influx has pushed the bank close to the caps imposed by European competition laws which restrict its ability to compete with the banking industry for customer deposits.

Northern Rock has agreed to hold no more than £17.6 billion in customer deposits – equivalent to 1.5% of all savings held in British institutions.

The bank has taken action recently to cut the interest rates it offers depositors, but it is expected to cut its rates again if the flow of funds continues.

Sources close to the company suggested the bank was just £1.5 billion short of the cap on Friday before concerns about Bradford & Bingley had emerged. If the flow of savings continues at the present rate, the bank will reach the cap in about two weeks.

Savers were said to be bombarding Bradford & Bingley’s website yesterday to withdraw their money. Although it was unclear how much money had been withdrawn, the sum is expected to run to billions unless the bank’s future is clarified this weekend.

Northern Rock is believed to have first seen a surge in deposits after rumours began to circulate about the financial health of HBOS in the days leading up to its deal with Lloyds TSB.

Barclays, HSBC and Royal Bank of Scotland are all thought to have benefited from large flows of deposits as customers began to fret about the future of HBOS.

Over the past two weeks about £10 billion of savings has flowed out of HBOS into rival institutions, according to banking sources.

HBOS has £258 billion in customer savings, giving it a 16% market share.

A spokesman for HBOS said: “We have a very resilient franchise and a very loyal customer base. In the first six months of the year we increased our deposits by 12%.”

National Savings is also expected to benefit from the uncertainty in the banking sector. The government-backed institution is considered to be another safe haven.

The rapid movement of deposits between institutions is likely to increase pressure for the government to push through new legislation that would give savers additional security over their deposits.

The current deposit-protection scheme insures customers against the first £35,000 of cash held with any bank should it collapse. The threshold covers about 96% of all deposits lodged with British banks.

Nonetheless, new legislation is expected to be passed soon that would move the threshold up to £50,000.

Concerns have been mounting that savings could begin to flow to other countries where deposit insurance covers a higher amount.

A number of wealthy Britons have been moving funds to Switzerland where certain types of account offer guarantees on the full sum that is deposited in them.

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