Rock 'should have been left to crash'

Professor Willem Buiter, now a professor at the London School of Economics, said Bank of England - effectively taxpayers' - money should only be lent out if the whole banking system was put at risk. That was not the case with Northern Rock, he said.

"This bank was not large enough to warrant a bailout. It did not pose a significant enough systemic risk to the banking system, so I think it would have been better to let it go," he told Radio 5 Live.

Putting the blame for the run on the bank firmly with No.10, Buiter savaged the tripartite system of regulation under which the Bank, the Treasury and the Financial Services Authority between them oversee British banks.

Under the system, set up by Brown in 1997 when he was Chancellor, the Bank has the money to do the bailout, the FSA has the information, which it receives from regulating and monitoring individual banks, while the Treasury has to give the nod to any release of funds from the Bank.

He said the structure was a "shambles" as it meant the three organisations struggled to share information fast enough to rescue Northern Rock before it suffered the run on its deposits that so shamed British banking.

"The main problem is that it puts information about banks that may be in trouble with one organisation - the FSA - and the money to do something about it in another - the Bank of England. That splitting of the information and the money is unwise," he said.

"By the time it gets to the [crisis] point, the Bank does not have the information, and has to be brought up to speed by the FSA. It is just a way of losing time and putting yourself in a situation where you are almost bound to miss the opportunity for killing the crisis off at an early stage."

Buiter said experts had criticised the tripartite system for this division of power and authority but the Government had done nothing about it.

Known as a renegade on the MPC, he was delivering the same message to MPs on the Treasury Select Committee today.

His remedy was to "either take the information to the money - give the Bank of England back power to supervise and regulate banks as it did before 1997, or take the money to the information - provide the FSA with the resources".