Who is to blame for the Northern Rock crisis?

Most people point the finger at management, who borrowed over their heads in the money markets to provide mortgages on the cheap. Others blame the Financial Services Authority, the banking regulator, and the Bank of England for not spotting trouble soon enough.

Why did the Bank of England not act sooner?

The Governor said the Bank was hampered by the interaction of four pieces of legislation. The first was the Market Abuse Directive, which prevented it from following its preferred course of action – a covert bailout of Northern Rock. However the Directive, introduced in 2005, meant that any such action had to be done in a overt, transparent manner.

If the Bank could not bail out Northern Rock in secret, why did it not agree to let Lloyds TSB acquire Northern Rock before its problems became public?

The UK’s takeover code – the second piece of legislation – meant that it was not possible to sell on the quiet. Any takeover of a public company has to be carried out according to a set of rules and regulations that meant the process would have to have been thrown open to other potential bidders. The only option was for the Bank to become the public lender of last resort, which is what it announced late last Thursday.

Why did that announcement backfire so badly?

In giving a lifeline to Northern Rock, the bank’s problems were thrown wide open, which caused widespread panic. Here, the third piece of legislation – the Financial Services Compensation Scheme for deposits – further fuelled the crisis. The scheme only guarantees a maximum of £31,700 of any depositor’s money. Making matters worse, Corporate Administration procedures – the fourth piece of legislation – meant that if Rock did go bankrupt, all its assets would have been frozen.

Why did the Treasury get involved?

Because the Bank’s guarantee to Northern Rock was not enough, the only way to stem the panic was for the Government to step in and guarantee 100 per cent of all deposits.

Having taken such a hard line, why did the Bank do a U-turn?

Mr King says the Bank was reviewing the situation on a day-to-day basis and that, in light of last weekend’s events it became necessary to change its stance.

Isn’t that a breach of what Mr King said about moral hazard?

The Governor argues that the Bank’s move is a carefully arranged and limited intervention.

Are critics convinced by the Bank’s response?

Questions remain as to why the Governor retreated. Some think he came under pressure from the Chancellor, Alistair Darling, and the Treasury. Others feel the Bank made the move to cover up some other, as yet unknown, banking losses.

What does the Chancellor’s guarantee for Northern Rock cover?

The Treasury has promised to protect all retail and commercial accounts opened by midnight on September 19. The guarantee covers future interest payments, the movement of money between accounts and deposits into existing accounts. The Treasury will also protect accounts opened at the bank by customers who shut their accounts between September 13 and September 19.

What about investors who lent money to Northern Rock?

If the bank goes bust, the Treasury will repay investors who made unsecured loans but will not cover those who bought the bank’s covered bonds, securities issued by Northern Rock’s structured investment vehicle or subordinated debt.

How much is the guarantee worth and how long will it last?

The Chancellor’s promise puts taxpayers on the line for a bill of £28 billion. The Treasury said yesterday that the guarantee would last “during current instability in the financial markets”.

What further action is Mr King calling for?

The Governor wants urgent reforms to overhaul the complex legislative framework that prevented the Bank from acting sooner to quell the crisis. George Osbourne, the Shadow Chancellor, said his party was ready to enter open discussions to put those reforms in place.

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