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Treasury were 'flat-footed' over Rock

A new governmental report has said the Treasury was “flat-footed” in the way they dealt with Northern Rock.

The Public Accounts Committee (PAC) issued a report condemning the lack of preparation, with chinks in the Treasury chain evident from as early as 2004.

MP Edward Leigh, Chairman of PAC, said: “The Treasury’s lack of preparedness for dealing with the failure of a major bank was evident as early as 2004 but nothing much was done to remedy the weakness.

“It is not surprising therefore that in September 2007, when there was a run on deposits at Northern Rock, the Treasury was caught flat-footed.”

The Treasury, the Bank of England and the Financial Services Authority tested their response to a national bank crisis in a 2004 exercise, which identified gaps in the framework to protect depositors.

Prior to 2007, the Treasury did not judge the improvements to be a priority.

A PAC statement said: “Very few people within the Treasury had the relevant skills to deal with the crisis at Northern Rock and it made extensive use of external advisers.”

The bank was nationalised in February 2008 with the tax payer giving £51bn to shore up the bank after customers lost faith in Northern Rock, who asked the Bank of England for emergency financial support, leading to £4.6bn being withdrawn over a few days.

The report also identifies problems in the way the Treasury handled Northern rock after 2007, but that, ultimately, nationalisation was the best option.

Edward Leigh said: “Even though the Treasury was pouring in billions to stabilize the bank, Northern Rock was allowed to carry on awarding high risk loans to the tune of £750 million.

“And, when the Treasury nationalised the bank in February 2008, it did not carry out its own due diligence on the quality of the Rock’s loan book; nor did it sufficiently challenge the company’s unrealistic forecast that house prices would remain much the same up to 2012.

“That said, the Treasury’s ultimate decision to nationalise Northern Rock in February 2008 was based on a comprehensive assessment of the options available to it. This analysis suggested that public ownership represented the best alternative in terms of value for money.”

This was posted in Bdaily's Members' News section by Ruth Mitchell .