Bank of England Northern Rock bailout 'should have been kept secret'

The former governor of the Bank of England (BoE) said a bailout plan to rescue floundering Northern Rock should have been kept secret, as it triggered a run on the lender's deposits.

The run began exactly 10 years ago on Thursday (14 September), after the BBC revealed the BoE had reached an agreement to bail out the Newcastle-based bank, which became the first British bank to suffer a customer-led run on its deposits since 1866.

The lender's business plan involved borrowing heavily in the UK and international money markets, extending mortgages to customers based on this funding, and then re-selling the mortgages on international capital markets in a process known as securitisation.

However, in the wake of the subprime mortgages crisis in the US, demand for securitised mortgages fell sharply, which left Northern Rock unable to raise enough cash to repay loans from the money market. In turn, the lender asked Threadneedle Street officials for liquidity support facility, a request that was granted but which sparked widespread panic among the bank's customers.

Mervyn King, who was the BoE Governor in 2007, said the run could have been avoided had the plan been kept under wraps as he had cautioned.

"My advice was very clear - we should not reveal publicly the fact we were going to lend to Northern Rock," he told BBC Inside Out, North East & Cumbria.

"Northern Rock and the Financial Services Authority (FSA) all felt it would be a good idea to reveal it. The advice of the lawyers and FSA was [keeping the deal secret] was against a European directive.

"Actually, none of my colleagues in Europe believed that for a minute."

King's version clashes with that of a bank insider, who told the programme that Northern Rock had in fact been eager to keep the bailout plan secret, but was then told it would be "illegal" to do so.

Robert Peston, the current political editor of ITV News, was the first to break news of the BoE rescue plan and has since maintained he made the right decision.

"Under the rules, the moment Northern Rock requests emergency help from the Bank of England in that way it has failed," insisted Peston, who in 2007 was the business editor on BBC's News at Ten.

"If I had not reported that event I would have been guilty of playing God in an incredibly patronising way.

"I'd have been effectively saying that adults were not capable of understanding the significant information and that would have been an appalling thing for any journalist to do."

News of the bailout led to thousands of customers queueing outside Northern Rock branches to withdraw their deposits. That in turn saw the bank's shares plummet 30%, leading to staff and customers losing thousand of pounds because of the stock's sharp decline, a process exacerbated by the ensuing nationalisation, which was completed in 2008.

A month after the run on Northern Rock, which was then sold to Virgin Money in 2012, the BoE approved secret loans worth a combined £61.2bn ($80.7bn) to Royal Bank of Scotland and HBOS as the financial crisis tightened its grip on Britain's banking sector.