Northern Rock's top managers, including chief executive Adam Applegarth, have today faced a grilling from the Treasury Select Committee in Parliament, in which MPs said they should resign.
The Select Committee was keen to discover why Northern Rock was the only bank to suffer from a bank run in over 150 years and whether Northern Rock’s senior management were to blame.
The Committee criticised the bank's senior managers for destroying the reputation of both Northern Rock and the British banking sector. Several members of the committee suggested members of the board should resign over the crisis.
Northern Rock's managers were criticised for failing to foresee the freezing of global credit markets, which the Select Committee said it was well aware of much earlier in the year. The bank said it had expected some problems in credit markets but claimed it did not expected worldwide markets to freeze for as long as they did.
Applegarth says the bank had weathered similar liquidity problems in the past, such as after the 9/11 terrorist attacks and when the dot.com bubble burst, but had not expect such a severe freeze in liquidity.
He also says it had three months worth of liquidity to keep the business going in a crisis but went to the Bank of England to ensure a sufficient backup was in place.
Northern Rock’s chairman, Dr Matt Ridley, confirmed the bank had borrowed £13bn from the BoE, as had already been speculated in the press, and said it was possible the bank may need to borrow more money in future.
However, Select Committee chairman John McFall MP criticised the bank for increasing its lending significantly in 2007 to take advantage of the fact other banks were scaling back their lending as markets became riskier.
The bank’s management were also criticised for failing to react to FSA criticism, which said the bank's ‘stress test’ did not cover a sufficient range of possible scenarios.
Despite this, Applegarth says there was nothing that could be done by himself or the bank’s senior management to mitigate the risks of such a crisis.
Meanwhile, private equity group, JC Flowers, says it is far ahead of a possible takeover offer of Northern Rock by the Virgin Group. The group is thought to be in the advanced stages of due diligence and has also secured significant funding to buy the bank.
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"Whilst there was obviously a problem which was not foreseen in the problems of Northern Rock by its Directors, if we demanded the resignation of MPs every time something went wrong in Government we would not have any MPs(perhaps a good thing). Getting an MP to resign is like drawing teeth. Is this back to government suggesting there is one rule for them and another for us mere mortals." Terry Arch, IFA, Eastgate Financial ServicesIFAonline
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