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Northern Rock board offered to resign

Chief executive of Northern Rock, Adam Applegarth, blamed the Bank of England's reluctance to bail out troubled financial institutions at the height of the global credit crunch as a key factor in its downfall.

The bank's entire board was also prepared to resign over the debacle, executives told MPs yesterday. Mr Applegarth said the mortgage bank, unlike rivals, was unable to access funds lent on favourable terms by the US Federal Reserve or the European Central Bank.

Sir Ian Gibson, the senior non-executive director at Northern Rock, said he had asked everyone on the board if they were prepared to resign over the funding debacle, and they agreed. But soundings in the City showed that investors wanted the board to stay and sort out the crisis.

The bank's bosses were questioned intensively yesterday by the Treasury select committee. Northern Rock has come under fire from MPs who said aggressive lending tactics combined with lax risk management controls were the chief causes of its near-collapse.

MPs have already taken evidence from the governor of the Bank of England, Mervyn King, and the main City regulator, the Financial Services Authority. The committee chairman, John McFall, has become increasingly frustrated that each group has refused to accept any blame.

Yesterday's three-hour session was the first time the bank's board had faced questions since it sought emergency funding from the Bank of England a month ago. Northern Rock chairman Matt Ridley told the committee the bank was hit by unforeseen events and the board acted properly throughout the ensuing crisis. During a nervous performance, he said he was ready to resign for his part in the debacle.

He faced accusations the bank ignored "red alert" warnings in the spring from the Bank of England and the FSA of an impending liquidity crisis and risks to its funding model. Mr McFall said a report in January from the FSA and one from the Bank of England in April highlighted concerns that a tightening in credit markets could make it difficult for British banks to raise funds.

Mr Applegarth said: "The fundamental cause was the speed and duration and the global nature of the liquidity freeze, heightened for us by the fact we didn't have access to the same type of borrowing facilities available to banks in the US and from the European Central Bank."

The chief executive, who is credited with masterminding the bank's reliance on wholesale markets for three-quarters of its funding to support its fast growing mortgage business, said a high street clearing bank, believed to be Lloyds TSB, was ready to make a bid for Northern Rock if it secured backing from the Bank of England. However, the central bank refused.

Asked if he believed Mr King's argument about moral hazard if lenders that made poor decisions were bailed out, he said: "I have a little difficulty understanding the moral hazard argument. [A run on the bank] wouldn't have happened if we had been able to announce a [takeover] deal with a facility from the Bank."

The insistence of the central bank that the lending facility offered to Northern Rock was "bespoke" rather than open to all banks also made the situation worse. Customers began to queue outside branches after discussions with the Bank of England about a rescue package became public knowledge.

Mr McFall asked what tests the bank had carried out to determine how a credit famine would affect its finances. Mr Ridley, who has faced criticism for his anonymity since crisis talks with the Bank of England were revealed on September 13, said the bank had satisfied the regulator during a review of its financial situation.

Source: The Guardian
Date: 18.10.2007 [119]

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