Since the reign of Queen Victoria the British banking system had maintained a rock-solid reputation, but events that began a year ago this weekend quickly triggered the first run on a bank in more than a century.

The images of savers queueing to remove their deposits flashed around the world – and the reputation of the UK banking system began to unravel, damage that could take many years to repair.

Ron Sandler, the man charged with managing what remains of the nationalised Northern Rock after the failed government-orchestrated effort to sell it, recognises the difficulty of the challenges he faces. Since the nationalisation the veteran troubleshooter has been wrestling to turn the bank around.

Mr Sandler, the executive chairman of Northern Rock, said yesterday that the company had had a tough quarter, with bad debts continuing to hit its mortgage book. However, the £90,000-a-month boss said that he took satisfaction in the progress the Newcastle-based bank had made since it was nationalised in February.

He listed the Rock’s achievements: “We’ve repaid a third of the government debt, attracted almost £4 billion of new retail deposits, reduced the scale of the bank from in excess of 6,000 people to 4,500, which hasn’t been an easy process, recruited a substantial new senior management team and agreed with the Government the basis on which the capital base of the bank will be strengthened.”

He and the Treasury are still hammering out details of a debt-for-equity swap, in which the Government will wipe out £3 billion of the Rock’s debt to the Bank of England in return for a theoretical increase in its equity stake in the bank. The Government will get its £3 billion back only if Mr Sandler can improve the bank sufficiently to find a private buyer willing to pay enough to cover the Treasury debt.

Mr Sandler said that market conditions had been challenging in the third quarter. The bank, which reported a £500 million first-half loss, is expected to stay in the red until 2010. In the first half, 1.18 per cent of the bank’s mortgages were in three-month arrears, compared with 0.38 per cent last year.

“Trends have unquestionably continued through the third quarter,” Mr Sandler said. He added, however, that all of the bank’s compulsory redundancies had been delivered and that the final 200 jobs to go by 2011 would happen through natural attrition.

Gary Hoffman, vice-chairman of Barclays, will join Northern Rock as chief executive next month. Mr Sandler, who will assume the role of nonexecutive chairman, said yesterday that there was still a considerable amount of work for Mr Hoffman to do.

“There’s still a long journey ahead of us,” Mr Sandler said. “There’s no questions that the plans we set out in March were well thought through, but all plans need mid-course corrections. He [Mr Hoffman] will surely see things that are far beyond what I can see because he has banking experience that I don’t have.”

The bank has installed a new chief risk officer, Rick Hunkin, formerly of GE Money, and a new human resources director, Richard Smelt, from Carphone Warehouse. Andy Tate, from Royal Bank of Scotland, is due to join the company as debt management director. The new executives will not sit on the board.

The board of Northern Rock is continuing to consider whether action might be taken against the bank’s former executives or directors, and it is not only Adam Applegarth, the former chief executive, and Matt Ridley, the chairman when it had to ask for state assistance a year ago, who face scrutiny. Alistair Darling is looking at a vicious legal battle with investors, led by SRM Global, the hedge fund manager, who allege that the Chancellor stole their shares while they were frozen.

Crisis of confidence

— Northern Rock was Britain’s fifth-biggest mortgage lender

— About 75 per cent of the funding for those home loans came from the interbank market and from issuing commercial paper, a type of debt

— As more and more banks were hit by losses from their investments in US sub-prime mortgages, they became reluctant to lend to one another

— At the same time, fund managers stopped buying paper issued by banks

— Without funding, Northern Rock was unable to do business. As a result, it had to seek a bailout from the Bank of England

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