UK govt soothes N.Rock worries with deposit pledge

LONDON, Sept 18 (Reuters) Shares in Britain's Northern Rock rebounded on Tuesday after the government guaranteed its deposits and regulators said they would consider overhauling the safety net for all UK savings.

Northern Rock shares, which had more than halved in value since Friday, jumped over 10 percent at one stage as the government's measures offered reassurance after the worst run on a major UK bank's savings in recent memory, and prompted hopes of a concerted effort to boost liquidity in the credit markets.

''Saying depositors are guaranteed still means equity holders can lose everything,'' banking analyst Alex Potter at Collins Stewart said. ''What this will do is stem the outflow (of savings). It doesn't fix their problem without a reversion to normality on the wholesale markets.'' The shares, battered by the credit crunch due to the bank's dependence on wholesale funding, were up 6 percent at 300 pence at 1338 GMT. They had earlier hit 318p, valuing the bank at just under 1.3 billion pounds.

UK finance minister Alistair Darling surprised investors on Monday by saying if necessary the government and the Bank of England would guarantee all existing Northern Rock deposits.

Britain's financial watchdog on Tuesday backed up the unprecedented step and said limits on the current safety net for deposits may have contributed to the uncertainty that prompted thousands to withdraw their savings.

The chief executive of the Financial Services Authority said the current system should be reviewed, a position backed by the British Bankers' Association. Darling is set to meet the FSA and the Bank of England later on Tuesday.

Under the current UK arrangement, guaranteed compensation is limited to 31,700 pounds -- below, for example, the U.S. 100 percent guarantee for deposits up to 0,0000.

CONTAGION FEARS Customers at Northern Rock, which provides one in 13 British home loans, are estimated to have withdrawn at least 2 billion pounds ( billion) since Friday, when the Bank of England stepped in with emergency funding. The bank had just over 24 billion pounds of retail deposits before the current turmoil, and assets of 113.5 billion.

Queues formed at branches of Northern Rock again early on Tuesday, but lines were far shorter than on Friday, Saturday and Monday, when customers waited hours to withdraw their cash.

''(The government is) doing something by public demand, they should have done something before,'' said one saver in her 50s who flew in from Italy to withdraw her savings.

''The horse has bolted. It's too late to try and close the stable door now,'' she said outside a London branch.

There have been mounting concerns that Northern Rock's problems would spread across the industry, and the government's move on Monday helped shares rebound across the sector, as the Treasury reiterated on Tuesday that no other banks beyond Northern Rock had asked the BoE for help.

Alliance&Leicester shares jumped 28 percent to 767 pence, having fallen 30 percent on Monday when speculation swirled that it could also seek funding help.

Bradford&Bingley shares were up 6.6 percent at 297 pence.

The cost of insuring UK mortgage banks' debt against default fell in credit markets, with five-year credit default swaps on Northern Rock tightening 33 basis points to 165 basis points.

Attempts by Northern Rock's chief executive Adam Applegarth, as well as government, bank and regulatory chiefs, to allay customer fears and unease across the sector had done little before Tuesday to reduce panic among some account holders.

But credit analysts said it was still unclear what the outcome would be for other obligations, including for bondholders.

''By law, senior creditors are pari pasu with depositors but you can bet that the government has no intention of underwriting NR's debt,'' Royal Bank of Scotland analysts said in a note.

''Upside for bondholders remains a full bid -- outside of that, sub debt looks vulnerable even at these levels.'' The liquidity crunch on the credit markets and ensuing turmoil at Northern Rock have left the bank's wholesale funding-focused strategy in tatters, and analysts agree it is now likely to be taken over -- should a buyer be found.

The bank said late on Monday that it was not in any talks but would consider all strategic options.

REUTERS DKS HS1916