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.
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.”
“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.”
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