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Treasury did not think bank crash was priority

The Treasury knew it was ill-prepared for a bank’s collapse as early as 2004 but failed to remedy this before the run on Northern Rock, a report has revealed.

The National Audit Office’s Northern Rock report published last week also shows that Rock sold £1.8bn of high-risk mortgages while getting state aid.

It says Rock continued to sell Together mortgages up to 125 per cent loan to value between September 2007, when it got emergency aid, and February 2008, when it was taken into public ownership.

The report adds: “The Treasury had been aware of potential shortcomings in the arrangements for dealing with a financial institution in difficulty prior to the crisis at Northern Rock. From 2004, the tripartite authorities had undertaken exercises to test their response to a range of scenarios.”

But it says, before 2007, this was not judged to be a priority by the Treasury, which also failed to conduct due diligence on Rock, even though it was aware of weaknesses.

In the report, a Rock spokesman says “The intention in the months at the end of 2007 and beginning of 2008 was to try and issue a private sector sale solution. We maintained an element of mortgage lending, albeit at much lower volumes, but when it became clear that this solution was not going to be achieved and we were moving towards public ownership, Together was withdrawn.”

But Chadney Bulgin mortgage partner Jonathan Clark says: “The fact that a third of Northern Rock’s mortgages fell into negative equity is largely a result of house prices coming down, not as a result of reckless lending.

“They set their stall out to brokers by doing unusual loans, high-income multiples and Together mortgages.

“They could not just sudd-enly stop offering those products overnight because that would have looked like a panic measure.”

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