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Northern Rock bosses 'could be grilled'

21/09/2007

Northern Rock bosses could be questioned by MPs about the lender's recent problems, it has emerged.

Asked whether such action was likely, the chairman of parliament's Treasury select committee, John McFall, told the BBC that if politicians were to "dig deep" into the issue they would "have to look at the market".

His comments come after the government stressed today that its guarantee to Northern Rock depositors covers renewed accounts, as well as existing savings.

Yesterday shares in the lender dropped by a further 28 per cent after the Treasury confirmed that it would not guarantee new accounts opened with the lender.

The Treasury's statement comes after Bank of England governor Mervyn King faced a grilling from MPs over his handling of the Northern Rock crisis and his response to the ongoing turbulence in the financial markets.

Appearing before parliament's treasury select committee, the head of the UK's central bank defended the apparent U-turn made by the institution in pumping billions of pounds into the longer-term money markets, despite having previously warned that to do so could encourage further risky lending by banks.

Some analysts claim that had action been taken by the central bank earlier, Northern Rock may not have been forced to apply to the institution for emergency funding last week - a move which prompted the first run on a British bank in recent memory.

Reports suggest that chancellor Alistair Darling is now planning a reform of the UK's banking laws, after Mr King suggested that existing legislation had hampered his response to the crisis.

Northern Rock was granted the emergency funds due to cash-flow problems resulting from a global credit squeeze. Amid rising default levels in the US sub-prime mortgage market banks have become more reluctant to lend money to one another on the wholesale market, given uncertainty about the extent to which they are exposed to bad debts in the sector.

It has now emerged that the head of the Financial Services Authority (FSA) is also to be questioned by MPs over the watchdog's role in the Northern Rock debacle.

FSA chairman Callum McCarthy will appear before the treasury select committee on October 9th, where he could face criticisms that the financial regulator failed to tackle concerns about Northern Rock's lending model prior to the bank falling into difficulty.

In a speech last night Mr McCarthy said that the UK's banks should reveal the extent of their exposure to the US sub-prime sector in a bid to try and return conditions on the credit markets to normal.

But he insisted that the UK's banks were "well capitalised".

"They have capital ratios which remain significantly higher than regulation requires," said Mr McCarthy, in a speech at the Mansion House in the City of London.

"While they may be subject to liquidity pressures, they have, with a single notable exception, coped well with these pressures to date," he added.