Treasury under fire over Northern Rock crisis
A committee of MPs has criticised the Treasury for being unprepared for a bank failure before the collapse of Northern Rock.
The Commons' committee of public accounts said the Treasury was "stretched" to deal with the crisis and failed to address shortcomings identified in a 2004 test to see how the department would deal with a bank if it got into difficulty.
"Prior to 2007, the Treasury did not judge the work to address these gaps to be a priority," the report 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 committee added.
Chairman Edward Leigh questioned Nick Macpherson, secretary of the Treasury, over the department's handling of the crisis at Northern Rock.
"What worries us is that you may have bought the house without carrying out a good enough survey, which is what we all do in our own lives," he said.
"You did not rigorously interrogate the company's forecast of market conditions. You did not question sufficiently the optimistic estimates Northern Rock made about future house prices.
"In other words, you did not know the full extent of the liabilities and commercial risks to which you had committed us, the taxpayer, which this Committee defends."
Sir Nick responded: "In reality, we had very few options and what this report proved conclusively is that the private sector options in the end were not good value, closing Northern Rock down was potentially even worse value, so nationalisation became inevitable."
Savers with Northern Rock panicked when the bank was forced to ask the Bank of England for an emergency loan in 2007 and over a few days, £4.6 billion was withdrawn.
The Treasury responded by guaranteeing the bank's liabilities, and ultimately made the decision to nationalise the Newcastle-based bank.
Since the government's action on Northern Rock, the Treasury has doubled the number of staff working on financial stability to 120, and plans to increase the number to over 160 by the end of 2009.
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