Northern Rock chiefs defend handling of crisis

Northern Rock’s embattled bosses today denied there was anything more they could have done to prevent the crisis that led to the UK's first bank run in nearly 150 years.

Chief executive Adam Applegarth and chairman Dr Matt Ridley told British MPs at a hard-hitting Treasury Select Committee hearing that they were victims of an “unforeseen” meltdown in credit markets.

Exasperated MPs on the cross-party committee accused the bank’s board of failing to heed early warning signs and tarnishing the UK banking sector’s reputation.

In a scathing attack on Dr Ridley and his role in the crisis, Conservative MP Michael Fallon said: “You are the chairman of the bank that ran out of money, that caused the first bank run in this country for 150 years. You have had to borrow billions of public money from the Bank of England and have damaged the good name of British banking. Why are you still clinging to office?”

The grilling into what went wrong at the Newcastle-based mortgage lender came a month after Northern Rock was forced to turn to the Bank of England as lender of last resort.

It was also the first time the Northern Rock management had faced a public quizzing since the bank was engulfed in the funding crisis.

The subsequent run on the bank, which led to an estimated £2bn (€2.8bn) being withdrawn by panicked savers, was only eased after the British Government stepped in to guarantee deposits held by the group.

MPs rounded on the bank’s chief executive and chairman over their reliance on money markets, which the lender uses for around 75% of its funding.

Money markets have virtually dried up over the past two months, sparked by soaring default rates on high-risk mortgages in the US.

Northern Rock also came under fire for what MPs claimed were aggressive lending tactics.

Mr Applegarth said the bank had already moved to diversify its funding lines, offload higher risk loans held on its books and adopt a slower growth lending model.

“We failed to foresee the global close down in markets but I don’t know anyone who foresaw the freeze,” he added.

John McFall, chairman of the committee, said the Bank of England had warned in April of the dangers of a sharp reduction in liquidity.

He said: “If that isn’t a red alert warning, I don’t know what is.”

When pressed by frustrated MPs on what he could have done differently, Mr Applegarth suggested the group could have adopted the slower growth model announced in June earlier.

He admitted in hindsight the group could have had more diversified funding.

However, Northern Rock lay much of the blame for the bank run on the leaking of news that it had called on the Bank of England for emergency funding.

The chief executive said a BBC report on the move that appeared before Northern Rock had prepared its announcement “caused immense difficulty”.

He also argued that the bank run could have been averted had Northern Rock been able to secure a takeover offer.

Northern Rock was in discussions with an interested acquirer before the bank run, but talks broke down when the Bank of England refused to offer the suitor an emergency funding facility, according to Mr Applegarth.

The Bank of England later confirmed a funding facility could be transferred to an acquirer, although this was only after the bank run had already started, MPs were told.

MPs heard how Mr Applegarth and Dr Ridley, alongside the entire board, offered to resign as the crisis escalated.

Northern Rock’s senior independent director Ian Gibson said shareholders, brokers and colleagues had been consulted and had felt it was best for them to stay in place and steer the group through the crisis.

The future of the Northern Rock now hangs in the balance, with a firm takeover offer still yet to appear.

A consortium led by Richard Branson’s Virgin unveiled plans at the end of last week to bring the lender into its Virgin Money business.

But Northern Rock warned yesterday that, while it was in talks with a number of potential suitors over a possible rescue deal, discussions were at a “very early stage”.

Weekend press reports also suggested that any takeover deal was likely to see shareholders receive next to nothing for their stakes.

Shares in Northern Rock are now only a sixth of their value since the start of the crisis.

The group has been forced to turn to the Bank of England for £13bn (€18.6bn) so far in emergency funding – a figure confirmed by Northern Rock for the first time today.

Dr Ridley said it had arranged for the facility to remain open until February, adding the bank may yet need to call on the funding for more cash.