The nationalisation of Northern Rock : thirty-first report of session 2008-09, report, together with formal minutes, oral and written evidence

By 2007 Northern Rock was the fifth largest mortgage lender in the UK, financing growth by raising funds from wholesale sources, such as other banks, and selling its existing mortgage book to investors.

In August 2007, credit concerns stemming from bad debts in the US mortgage market caused banks to curb their lending to each other and investors to stop buying mortgage-backed securities.

Northern Rock had problems raising funds and asked the Bank of England for emergency financial support.

When Northern Rock's customers became aware of the support, queues formed outside branches and, over a few days, GBP 4.6 billion was withdrawn.

The Treasury stabilised the situation by providing a series of guarantees to retail depositors and wholesale lenders.

This action avoided the immediate risk of problems spreading to other banks.

At its peak, the taxpayer underwrote up to GBP 51 billion of the company's liabilities.

Northern Rock searched unsuccessfully for a private sector buyer and the Treasury decided that nationalising the company offered the best means of protecting the taxpayer. The Committee's findings include the following: the Treasury was stretched to deal with a crisis of this nature.

The Treasury, the Bank of England and Financial Services Authority (the Tripartite Authorities) had undertaken an exercise in 2004 to test their response if a bank got into difficulty and had identified gaps in the statutory framework to protect depositors.

Prior to 2007, the Treasury did not judge the work to address these gaps to be a priority.

Very few people within the Treasury had the relevant skills to deal with the crisis at Northern Rock and it had to make extensive use of external advisers.

The March 2009 National Audit Office report on this topic (HC 298, ISBN 9780102954708) is available to buy separately.