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Gov’t knew of Rock and HBOS weakness in 2004, says report

The FSA and the Treasury knew that both HBOS and Northern Rock were vulnerable to risk after simulating economic downturns, according to the Times.

The newspaper revealed that the authorities played “war games” to simulate stresses in the UK and world economic systems in 2004, and found that Northern Rock was the country’s most vulnerable bank. It also found that HBOS too would not be able to stand up to a huge shake-up in the world markets.

The paper says this is contrary to Government assurances that it could not have predicted the collapse of Northern Rock in 2007.

In February, Prime Minister Gordon Brown admitted to a Treasury Select Committee that the FSA was closely monitoring most of the UK banks and building societies.

He said: “We carried out a huge exercise to examine what would happen if a bank or major institution ran into problems. We did a simulation exercise; we brought in the chairman of the US Federal Reserve, the Treasury secretary of the time, Hank Paulson, we had all the American regulators present, we had the governor of the Bank of England, we had the chairman of the FSA, I myself was also there as Chancellor. We did this video conferencing, looking at the problems that could come up.

“We wanted to be absolutely sure that we had looked at the solvency as well as the liquidity of financial institutions.”

Brown also admitted that this simulation included HBOS and Northern Rock, but denied that this exercise revealed any problems in the UK banking sector.

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