Treasury 'caught flat-footed' over Northern Rock crisis

Published on Thursday 25 June 2009 00:13

AN UNDER-prepared Treasury was "caught flat-footed" by the run on mortgage lender Northern Rock in September 2007, MPs will say today.

The Public Accounts Committee (PAC) will attack the department's lack of readiness to deal with a failing bank despite warning signs emerging as early as 2004.

PAC chairman Edward Leigh warns: "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."

Northern Rock – the first UK bank victim of the credit crunch – was propped up by almost 27 billion in emergency loans from the Bank of England and eventually nationalised last February.

The MPs were responding to a damning report published by the National Audit Office (NAO) spending watchdog in March.

The NAO said the bank was offering its infamous Together mortgage – lending up to 125 per cent of the value of homes – from the time of its emergency support until it was on the brink of public ownership.

The watchdog also found the Treasury failed to properly assess risks, carry out its own due diligence, or challenge over-optimistic business plans after nationalising the lender.

"The taxpayer was exposed to enormous risks and liabilities to an unknown degree," Mr Leigh added. There were around 60 staff working on financial stability issues in the Treasury during 2007 – but the pace at which it worked on measures to deal with a bank in difficulty was "leisurely", the PAC's report said.

The Treasury's financial stability staff in this area has since doubled to 120 and the department has plans to increase it to more than 160 by the end of the year.