Press Release - The
nationalisation of Northern
Rock
20 March 2009
The NAO has reported that the nationalisation
of Northern Rock in early 2008 offered the best prospect of
protecting the taxpayers’ interests and was based on a sufficiently
robust analysis of the options available. However, the Treasury was
stretched to deal with a crisis of this nature and there were
lessons to be learned.
In 2004, the Tripartite Authorities – HM
Treasury, the Bank of England and the Financial Services Authority
- had identified gaps in their capability for dealing with a
failing financial institution, but although work was taken forward
it was not judged a priority in the circumstances at the time.
At the time of the initial run on deposits at
Northern Rock, the Treasury put in place guarantee arrangements for
retail depositors and wholesale creditors. The immediate risk
of instability in the financial system was stemmed. But the
Treasury could have been more engaged with the actions being taken
in the early stages by Northern Rock. As a condition of public
support, mortgage lending was reduced but the company still went on
writing high-risk loans up to 125 per cent of a property’s
value. Mortgages of this type have a higher default rate.
In late 2007 and early 2008 the Treasury
conducted a comprehensive review of the long-term options for
Northern Rock. It considered the deliverability of private
sector bids for the bank, but concluded that there was insufficient
prospect of their attracting the financial backing or demonstrating
the resilience needed for a viable solution. Public ownership
therefore became the best course in the interests of the
taxpayer.
When considering Northern Rock’s first
business plan in public ownership, the Treasury could however have
done more to test the company’s initial business plan, and to
challenge with greater rigour its forecast of trading
conditions.
Tim Burr, head of the National Audit Office, said
today:
“The Treasury successfully met its
objective to protect Northern Rock’s depositors and stopped the run
on the bank. It rightly concluded that the private sector bids for
the bank gave insufficient prospect of safeguarding the taxpayer’s
interest. The Treasury could however have conducted a more
systematic assessment of the risks it was taking on and more
thoroughly tested the bank’s initial business plan in public
ownership.”
Notes for Editors
- Press notices and reports are available from the date of
publication on the NAO website, which is at
www.nao.org.uk. Hard copies can be obtained
from The Stationery Office on 0845 702 3474.
- The Comptroller and Auditor General, Tim Burr, is the head of
the National Audit Office which employs some 850 staff. He
and the NAO are totally independent of Government. He
certifies the accounts of all Government departments and a wide
range of other public sector bodies; and he has statutory authority
to report to Parliament on the economy, efficiency and
effectiveness with which departments and other bodies have used
their resources.
Press Notice 20/09
All enquiries to Mark Anderson, NAO Press
Office:
Tel: 020 7798 7558
Mobile: 07796 937119