Page last updated at 23:01 GMT, Wednesday, 24 June 2009 00:01 UK

Report critical of Rock response

Northern Rock branch
The committee said high-risk loans were allowed for too long

The Treasury was "leisurely" in updating its plan for dealing with a bank in trouble, according to a report by a committee of MPs.

The weaknesses over readiness for a bank hitting difficulties were clear in 2004 - three years before the run on the Rock, the report said.

The Public Accounts Committee (PAC) view is the latest critical report on the Northern Rock crisis.

The bank was nationalised in February 2008 and remains in public ownership.

"The Treasury must never again be so ill-prepared. As this crisis has shown, the Treasury's ability to respond effectively to future financial crises must be maintained at the highest level," said PAC chairman Edward Leigh.

High-risk loans

The report draws the same conclusions as a National Audit Office review, published in March, that shortcomings over the readiness of dealing with a bank in trouble were clear in 2004.

However, the pace with which the Treasury acted to remedy this was too slow, both reports found.

"It is not surprising therefore that, in September 2007, when there was the run on deposits at Northern Rock, the Treasury was caught flat-footed," said Mr Leigh.

"The taxpayer was therefore exposed to enormous risks and liabilities to an unknown degree."

Until the bank - the fifth biggest mortgage lender in the UK - was nationalised, it still wrote around £750m of high-risk loans of up to 125% of the value of a property, the PAC report said.

'Expertise'

Very few people in the Treasury had the relevant skills to deal with the crisis at the Rock, the report said.

We took the right decision to protect depositors and taxpayers, and put the bank on a sound and proper footing
Treasury spokesman

The Treasury relied on work done by advisers to the Bank of England and the Financial Services Authority, for separate purposes, instead of commissioning its own review of the Rock's loan book.

It also employed Goldman Sachs from September 2007 to provide advice over the future of the Rock. The PAC criticised the Treasury for "slavishly" following investment banking industry practice in agreeing to a £4m "success fee" in the initial contract with Goldman Sachs.

"There was no clear definition of success in a complex and evolving situation," the PAC report said.

The fee was actually never paid, but the PAC also criticised the Treasury for another aspect of the contract with Goldman Sachs. This allowed the investment bank to refuse the National Audit Office access to the financial models it had developed to inform the Treasury's decision on the future of the Rock.

The PAC also hit out at the Treasury acceptance of the Rock's business plan after nationalisation.

This was "over-optimistic" about the future of house prices, even compared to forecasts available at the time, as it suggested that there would be a 5% fall in house prices in 2008.

House prices actually fell by 15.9% in 2008, according to the the Nationwide building society.

The committee also called for the Auditor General to be allowed the "unfettered power" to audit the Financial Services Authority's work, given the billions of pounds of taxpayers' money that was now tied up in the banking system.

Response

Responding to the report, a Treasury spokesman said: "Both the Public Accounts Committee and the National Audit Office have found that we took the right decision to protect depositors and taxpayers, and put the bank on a sound and proper footing.

"The consequences of not taking this action would have been devastating, not just for savers but for the wider financial system and the economy as a whole."

By the end of December, the Rock had repaid £11.3bn of the loan from taxpayers, which was above its target of £8.3bn.

In February, the government said the bank could start handing out mortgages again - expected to be worth £14bn by 2010.



Print Sponsor


SEE ALSO
Bank regulation system 'failed'
01 Jun 09 |  Business
Mergers affect safety of savings
24 May 10 |  Business
EU broadens Northern Rock probe
07 May 09 |  Business
Borrowers flock to Northern Rock
23 Apr 09 |  Business
Treasury slated over Rock lending
20 Mar 09 |  Business
Rock report adds to ammunition
20 Mar 09 |  UK Politics
Bank nationalisation 'not needed'
08 Mar 09 |  Business
Northern Rock makes 1.4bn loss
03 Mar 09 |  Business

RELATED INTERNET LINKS
The BBC is not responsible for the content of external internet sites


FEATURES, VIEWS, ANALYSIS
Has China's housing bubble burst?
How the world's oldest clove tree defied an empire
Why Royal Ballet principal Sergei Polunin quit

BBC navigation

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.

Americas Africa Europe Middle East South Asia Asia Pacific