Northern Rock chiefs face Treasury committee
The heads of Northern Rock today were questioned by the Treasury select committee.
Chief executive Adam Applegarth and chairman Matt Ridley were questioned publicly for the first time since the crisis hit Northern Rock last month.
At the time, the mortgage lender was criticised for its “extreme” business model by Sir Callum McCarthy, the chairman of the Financial Services Authority (FSA).
Mr Applegarth told the committee “no one” could have predicted the “wholly unexpected” global freeze in liquidity that caused the run on the bank.
He went on to say the problem was global with over 150 European banks – including UK lenders – turning to the European Central Bank for funding.
Mr Ridley said: “The Northern Rock business model was a good one that proved unable to cope with an unexpected seizure of the money markets in August.”
The chairman added he would resign if called on to do so by directors.
The committee also heard the entire board had offered to resign – but it was decided it would be better hold on to steer Northern Rock through the crisis.
Liberal Democrat committee member John Thurso told BBC Radio 5 Live’s Wake Up To Money that the issue was whether there were business or regulatory failures.
“It’s a question of is this a regulatory issue or is it that they have a business model where they’ve taken the regulations to such an extreme that they are culpable? I mean my suspicion is there’s culpability all round,” he said.
“They were lending at 125 per cent which means that they were lending 95 per cent on security and the balance unsecured which can hardly be called prudent lending.”
Before the meeting Conservative committee member Michael Fallon raised the issue of bonuses and incentives for the board members dependent on the growth in the volume of business.
Liberal Democrat committee member Colin Breed told the Financial Times: “[Northern Rock] increased the level of their business by employing an extreme model – was that a board decision or was it pursued by the executives without much understanding by the non-executives?
“As a former banker, I find it hard to believe that they have a good loan book when they have been lending 125 per cent of a property’s valuation and providing funding based on five to six times income.”
Analysis of Bank of England assets by New Star suggests Northern Rock has now borrowed £12.9 billion from the lender of last resort to aid its liquidity problems.
Northern Rock now looks set for a takeover with Sir Richard Branson’s Virgin and a number of US private equity firms expressing interest in buying the troubled lender.
