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Northern Rock bosses grilled

16/10/2007

Northern Rock bosses faced MPs today to explain their role in the crisis which resulted in the first run on a British bank in almost 150 years.

Last month worried savers withdrew more than £2 billion from Northern Rock, after it emerged that the company had asked the Bank of England to act as its lender of last resort.

The company's chief executive Adam Applegarth told the Treasury select committee that Northern Rock had "failed to foresee" the global slowdown in the credit markets which prompted the move.

But the bank's chairman Matt Ridley insisted that Northern Rock could not have predicted the worldwide credit squeeze, which came after the collapse of the sub-prime mortgage market in the US.

Nonetheless he added that he would be prepared to resign over the matter if Northern Rock's board felt it appropriate.

Speaking about the Northern Rock crisis, Mr Applegarth described last month's run on the bank as "extremely distressing". He added that the leaking of news that the lender had asked the Bank of England for emergency funding had caused "immense difficulties".

Mr Ridley said he had been "surprised" over the extent to which the central bank's credit facility had failed to reassure customers about Northern Rock's stability and also warned that there was a "great deal of work to be done" to find out how the crisis occurred.

But when pressed by MPs he acknowledged that Northern Rock might have to go back to the Bank of England for more cash in the wake of the global credit crunch.

The Newcastle-based bank was forced to request last month's emergency money from the central bank after it ran into liquidity problems resulting from the credit squeeze. The difficulties have occurred as a result of rising default levels in the US sub-prime mortgage sector, which makes home-loans available to those on low incomes or with poor credit ratings.

Banks have subsequently become more wary about lending cash to one another on the wholesale markets, due to uncertainty about the extent to which they are exposed to bad debts in the sector.

Northern Rock's chiefs today faced questions by MPs about the bank's business model, which sees the lender raise most of the cash it provides for mortgages via the wholesale credit market. As such the bank was particularly vulnerable to the impact of the credit crunch.

Bank of England governor Mervyn King and the chief executive of the Financial Services Authority (FSA), Hector Sants, were previously grilled by the Treasury select committee about their role in the Northern Rock debacle.