Treasury torn apart over bank failures

The public accounts committee said billions invested in Royal Bank of Scotland and Lloyds may be lost and it slammed the Treasury for making a series of costly mistakes in its handling of Northern Rock.

It said officials were slow to react to the start of the banking crisis in 2007 because they didn't have the right skills or knowledge.

That made losses on the Northern Rock rescue, which auditors earlier this year estimated would cost £2bn, difficult to avoid.

Committee chairwoman Margaret Hodge said: "The Treasury had spent five months trying to find a private-sector buyer before giving up.

"After nationalisation, it then failed to effectively challenge the optimistic business plan put forward by the bank's management to split the bank."

Earlier this year top Treasury official Sir Nicholas Macpherson admitted the taxpayer lost out because of five months of "drift" as the crisis unfolded.

The committee's report said the Treasury has accepted its part in a "monumental collective failure."

It has now set up a dedicated team, UK Financial Investments (UKFI), to manage taxpayer shares in banks.

Mrs Hodge added: "UKFI was also too slow to challenge the strategy of Northern Rock even though the bank was losing money.

"Once UKFI decided to sell the bank there were only two bidders and it was fortunate that Virgin Money was particularly keen to buy.

"It is vital that the final decisions on the wholly owned banks (RBS and Lloyds) are made with value to the taxpayer taking precedence over speed of exit."

She warned: "This will not be the last banking crisis, and the next one is likely to be different.

"The Treasury must ensure it retains the right staff with the right skills to understand the risks and respond effectively."