UK Treasury Criticized over Northern Rock Failure
The British taxpayer was exposed to enormous risks when mortgage lender Northern Rock foundered because the Treasury had not prepared for a bank failure, a parliamentary committee said on Thursday.
The problem was evident from 2004, but had not been tackled three years later when the authorities stepped in with an emergency loan and investors rushed to withdraw their savings, the Committee of Public Accounts said in a report.
“The Treasury was caught flat-footed,” said Edward Leigh, the opposition Conservative MP who chairs the committee. “The taxpayer was therefore exposed to enormous risks and liabilities to an unknown degree,” he added.
“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 pounds.”
The Labour government calmed the panic by guaranteeing deposits, but in February 2008 was forced to nationalize Northern Rock, Britain’s first high profile victim of the credit crunch.
The decision to nationalize was based on an analysis suggesting it would provide the best value for money, Leigh said.
The report is likely to add to the debate about reforms to the tri-partite system of financial regulation under which responsibility is divided between the Treasury, the Bank of England and the Financial Services Authority.
It said the three parties had identified gaps in the statutory framework to protect depositors in 2004, but that the Treasury had not viewed work to address these as a priority.
Leigh urged the Treasury to ensure that swift action is taken in future to deal with shortcomings.
The criticisms echo those in a report by Britain’s public spending watchdog released in March.
The Treasury defended its actions.
“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,” a Treasury spokesman said.
“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.”
Tags: British taxpayer, financial system, UK Treasury Criticized
