Shares in Northern Rock have recovered 11% (11am Tuesday) after the Government promised to protect savers’ deposits.

Chancellor Alistair Darling made this pledge as a result of intense financial and political pressure, providing relief in the banking sector, especially amongst those banks like Alliance & Leicester and Bradford & Bingley considered vulnerable to the credit crunch.

Northern Rock chief executive Adam Applegarth said: “The simple fact is that the Chancellor has made it clear that all existing deposits in Northern Rock are fully backed by the Bank of England and are totally secure during the current instability in the financial markets.

“These have been troubled times, but Northern Rock will prevail.”

 BBC Economics editor Evan Davis said that the cash guarantee was a “dramatic step” and essentially a “money back guarantee”.

The Bank of England has also pumped £4.4bn into the economy in an attempt to free up credit lines.

ED’S COMMENT: Close, but no disaster

DESPITE STATING last week that the Bank of England would not intervene in the affairs of banks that had over-exposed to the money markets, Chancellor Alistair Darling had little option but to guarantee Northern Rock’s savers’ deposits in a last-ditch rescue operation. And have no doubts that what the Chancellor did was exactly that. If Northern Rock had been allowed to go over, the contagion would have spread to other banks and faith in the entire system undermined. The banks should now review their own funding arrangements as a matter of urgency and the senior executives and board members of Northern Rock search their consciences and do the decent thing if that is what the situation requires. I wonder how many will conclude that the decent thing is the honourable thing to do.