Brown 'ignored 2004 warning on bank cash crisis'

A bombshell official report revealed that the Treasury realised in 2004 that it did not have a proper plan to deal with a bank that ran out of ready cash and put the financial system under threat.

But at the height of the boom, it was decided that the threat was not important enough.

Just two years later the credit crunch brought Northern Rock to its knees and began a banking meltdown that drove the country into recession.

Conservatives and Liberal Democrats today turned the heat on the Prime Minister who, as Chancellor at the time, was in charge of decisions after the warnings were sounded.

Shadow treasury secretary Phillip Hammond said: "The fact that Gordon Brown was head of the Treasury who were warned about the system's inability to deal with this scenario but chose to ignore that warning says all you need to know about his lack of competence. This demonstrates why he is part of the problem, not the solution."

Liberal Democrat shadow chancellor Vince Cable said: "Gordon Brown had his head in the sand."

The 2004 warning was revealed in a scathing report from the National Audit Office into the nationalisation of Northern Rock a year ago.

It disclosed that the tripartite regulators - the Treasury, the Bank of England and the FSA - decided to hold war-gaming exercises to test their ability to handle crises. One of the first tests was of options if "a major financial institution got into difficulty for liquidity reasons".

It went on: "The report of the exercise noted that thinking was relatively underdeveloped as to how the resolution of an insolvent firm with systematic repercussions would be handled and by whom.

"It concluded that work was required to understand the issues they would face in dealing with an insolvent institution posing potential systemic risks to the financial system."

But the NAO disclosed that the Treasury did not feel it was a likely enough danger.

"At this stage, work on improving the existing arrangements was not considered within the Treasury to be a priority, in the benign economic environment then prevailing, compared with other financial crisis planning that was being taken forward."

In 2005, the tripartite authorities concluded more work was needed because its only options were to let a bank fail or to bail it out with taxpayers' cash.

Further exercises were held in 2006 and 2007 - too late to draw up a plan for Northern Rock.

A senior No 10 official today said the credit crunch was "unprecedented" and stressed that Northern Rock had been rescued so that no depositor lost a penny. Hepointed out that the bank had since repaid government loans faster than expected and was able to return to mortgage lending.

Business Secretary Lord Mandelson defended the decisions on Northern Rock but admitted he had not read the NAO report..