Treasury staff lacked “relevant skills” to deal with Northen Rock crisis

June 30, 2009 at 1:37 pm 1 comment

northernrock
An influential committee of MPs has accused HM Treasury of being ill-equipped to deal with the crisis at high street bank Northern Rock in 2007.

The run on deposits at the bank, the fifth largest mortgage lender in the UK, ultimately led to public ownership in February 2008.

The Public Accounts Committee said it was the first major test in recent times of the Treasury’s capacity to deal with a bank in difficulty.

“To finance its growth the company depended on raising funds from wholesale sources such as other banks, and selling its existing mortgage book to investors,” the committee said in a report into the circumstances surrounding its nationalisation.

“In August 2007, credit concerns stemming from bad debts in the US mortgage market caused banks to curb their lending to each other and investors to stop buying mortgage-backed securities.

“Northern Rock began to experience problems raising funds and asked the Bank of England for emergency financial support.”

The committee said the Treasury was “stretched” to deal with the unfolding crisis.

Northern Rock’s customers panicked, queues formed outside branches and, over a few days, £4.6 billion was withdrawn.

The Treasury stabilised the situation by providing a series of guarantees to retail depositors and wholesale lenders.

This action avoided the immediate risk of problems spreading to other banks.

At its peak, the taxpayer underwrote up to £51 billion of the company’s liabilities.

Throughout the period of emergency support the company agreed, amongst other measures, to reduce mortgage lending, but continued to write loans of up to 125% of a property’s value.

“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 said.

“Although Goldman Sachs commenced work as the Treasury’s financial adviser in September 2007, a fee structure was not agreed until January 2008.

“The agreement included a monthly retainer plus a success fee, but success was not defined.”

Edward Leigh MP, Chairman of the Committee of Public Accounts, 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 this weakness.

“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.

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

“Even though the Treasury was pouring in billions to stabilise 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.

“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.

“This involves making sure that, in future scenario testing, action is swiftly taken to deal with any shortcomings that emerge.”

photo: davidfarrer@flickr.com

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Entry filed under: Committees, Commons. Tags: , , , , , , , , , .

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