The Government stepped in this week to guarantee existing deposits in Northern Rock after the crisis of confidence threatened to spread to other banks. Here, Times Money explains what the week’s events mean for savers, borrowers and investors.

Why did the Government decide to guarantee savers’ money in Northern Rock? The move was meant to provide peace of mind to people with savings in Northern Rock and to restore confidence in the banking system. Savers began a run on the bank last Friday after it emerged that the Bank of England had granted Northern Rock an unlimted line of credit.

How long will the Government continue its support? For as long as the credit crunch continues. Northern Rock’s troubles stem from a global slowdown in inter-bank lending, which the bank relies on for funding. Experts do not know when the banks will start lending money to each other again at reasonable interest rates, but the Government has promised to guarantee to cover savers’ deposits until then.

I have a mortgage with Northern Rock. What should I do now? Brokers say that mortgage customers are not directly affected. Katie Tucker, of John Charcol, the broker, says: “The only way they may be affected is that Northern Rock will struggle with customer service during this period. Allow extra time if you need to contact the bank.”

If, as many predict, the bank is taken over by another financial institution, its mortgage book will be transferred to the new owner.

What should I do with my Northern Rock shares? The share price has fallen from £11 to £3 since June. Experts are divided over whether or not it will recover. Brian Dennehy, of Dennehy Weller & Co, the independent financial adviser, says to sell, adding: “It is unlikely that any takeover will see the price rise much higher, and there is a risk that the stock could sell for less.”

However, Justin Urquart Stewart, of Seven Investment Management, another adviser, says to hold on to your shares. “Leave them as they are,” he says. “While there is risk of a ‘fire sale’, there is also a chance that Northern Rock will be seen by one or more bidder as an undervalued asset. Competition for the stock could see the price rise again.”

Could the same problems hit other banks? Other banks are unlikely to suffer the same fate as Northern Rock because they are less exposed to the tightening of credit conditions. Most high street banks use deposits from savers to fund a larger proportion of their home loans. Many institutions, such as Alliance & Leicester, do use wholesale money markets, but they rely on them to a lesser extent than Northern Rock.

How safe are my savings in other banks? There is no immediate or credible risk to savings in other UK banks. Treasury officials have said that the same guarantee offered to Northern Rock savers would apply to any other retail institution that found itself in the same position.

Will this crisis affect my chances of getting a good mortgage? Borrowers who have a good credit rating and have saved a deposit should not find it any more difficult to obtain a good mortgage. However, borrowers who have a poor credit rating and who have failed to raise a deposit will find it more difficult to land a good deal. James Cotton, of London & Country, the broker, says: “Borrowers who need a mortgage at the riskier ends of the market will be faced with higher rates than were available a month or two ago.

“The effective cost of a credit slip-up has increased, so borrowers will need to be extra vigilant with their loan commitments.”

Of the better deals still available, Scottish Widows will lend 110 per cent of the value of a property to professional workers at a fixed rate for two years. Borrowers with minor lapses on their credit ratings can obtain a two-year tracker loan from Godiva, the specialist intermediary of Coventry Building Society, at 6.15 per cent with a £999 fee, or a two-year fix at 6.55 per cent with the same fee.

Is there any silver lining to this whole fiasco? The outlook for interest rates has improved. On Tuesday the US Federal Reserve cut rates in an attempt to stabilise markets and boost the American economy. Some economists now predict that the Bank of England will follow with a rate cut of its own next month, which is good news for borrowers.

The worst-hit shareholders

The dramatic collapse in the share price of Northern Rock is bad news for the financial groups with large stakes in the mortgage bank.

Worst hit was Baillie Gifford, the fund manager, which was the largest shareholder with a 6 per cent stake. Other big losers were the insurers Scottish Widows, which held 4.7 per cent of the company, and Legal & General, which had close to 4 per cent.

However, fund managers such as Neil Woodford, who runs the Invesco Perpetual Income and High Income funds, and Tim Steer, manager of New Star UK Alpha, have avoided trouble because they have minimal exposure to banks in their portfolios.

CASE STUDY

After finding it impossible last Friday morning to access his savings account online, or get through on either of Northern Rock’s telephone lines, Martyn Wilkins started to panic.

Mr Wilkins, of North Lincolnshire, eventually spoke to a staff member on Friday afternoon, but by then he had made up his mind to take his retirement savings out of the bank.

He requested a same-day withdrawal, but was told that Northern Rock could not guarantee that his savings would arrive in his account until the following Monday. When the transfer did arrive in his new Birmingham Midshires savings account on Tuesday, the amount fell short by £600.

Northern Rock has so far been unable to tell Mr Wilkins if his account has been closed or the wherabouts of the rest of his money.

“It has been a catalogue of errors,” Mr Wilkins says. “The staff tell me that they are under a great deal of pressure, but their chief executive says that it is business as usual. It is difficult to know what to believe.”