Bank made risky loans after bailout

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The finding came in a National Audit Office report which said an under-prepared Treasury failed to assess risks after nationalising the lender in February 2008.

Northern Rock continued to lend borrowers up to 125% of the value of their homes until it was on the brink of public ownership.

While the terms for the controversial loans were tightened, the product still accounts for 50% of the lender's arrears and 75% of repossessions.

The Treasury - which until February was pursuing a private sector sale - "judged mortgage transactions were necessary to maintain the business" while a long-term solution was sought, the NAO said.

Edward Leigh MP, chairman of the Public Accounts Select Committee was scathing at the Treasury's failure to clamp down on the riskier loans.

He said: "While depositors were queuing up outside branches to withdraw their money and the Treasury was pouring public money in to stabilise the Rock, the bank was still ploughing on with awarding mortgages up to 125% of a property's value. Why didn't the Treasury demand an immediate stop to the reckless lending that got the bank into trouble in the first place?"

The Treasury had also been aware of "potential shortcomings" in dealing with a failing bank as early as 2004, the NAO said.

The Tripartite Authorities - which include the Financial Services Authority, the Treasury and the Bank of England - had identified the need for further work but it was "not judged by the Treasury to be a priority in a benign economic environment".

The Treasury should address this issue "with vigour", the report said.