a Once the initial guarantee arrangements were announced the taxpayer was exposed to risk. As a condition of receiving public support, the volume of mortgage business written by the company was reduced significantly. Throughout the period of that support, however, Northern Rock continued to write together loans of up to 125 per cent of a property's value. Where it decides to provide support to a company in difficulty, the Treasury should assess systematically the risks to the taxpayer, as distinct from the risks relevant to the responsibilities of the other Tripartite Authorities acting as lender or regulator. It should also identify what information will be needed to monitor those risks and decide how they should be mitigated.
b Scenario tests conducted by the Tripartite Authorities prior to the collapse of Northern Rock had identified potential weaknesses in the arrangements for dealing with a bank in difficulty. When reviewing the lessons to be learned from future scenario tests, the Tripartite Authorities, having identified the lessons learned and agreed an action plan with target dates, should take forward the necessary work with vigour. The Tripartite Authorities should review progress against these targets at suitable intervals.
c The need to revise Northern Rock's business plan so soon in the light of tougher economic conditions illustrates the importance of developing sufficiently robust business plans from the start. The Treasury should vigorously challenge the assumptions underlying any future business plans presented by Northern Rock. Any financial forecasts should be tested under a sufficiently wide range of economic assumptions, both positive and negative.
d At the time it took Northern Rock into public ownership, the Treasury had not conducted due diligence on the company, for example on the quality of the entire loan book. Although the Treasury worked with the Bank of England and Financial Services Authority to find a solution and benefited from their advice, it alone had responsibility for determining what action was in the best interests of taxpayers. The Treasury should use future scenario testing exercises to trial the actions that would be needed in the time available to it to properly assess and validate the information it receives on the quality of the underlying business of a financial institution in difficulty. This assessment can then inform the Treasury's scrutiny of any proposed business plan should an individual institution require public support.
e In deciding to take Northern Rock into public ownership, the Treasury considered the outcome of its financial analysis to be uncertain and gave due weight to the deliverability of private sector bids. In any comparable situations in the future, the Treasury should follow the practice adopted here of looking beyond financial estimates to consider the deliverability of the options open to it and the likelihood of protecting the taxpayers' interest.
f Once the scale of the crisis became clear, the Treasury benefited from assigning responsibility to a senior official for managing its response. In future crisis situations, the appointed officials, as in this case, should have sufficient seniority to marshal the necessary resources, make clear the Treasury's position to third parties and act as a focus for overseeing the response at official level. The arrangements put in place should also spell out the role of the Treasury board in helping to manage the risks. The Treasury should also examine the training and development it provides its officials to handle such situations, for example drawing on the experiences in other parts of the public sector, for instance in civil and military contingency planning, where preparation for handling a crisis is a key part of staff development.
g The Treasury required extensive professional advice and was necessarily dependent on its advisers for support in evaluating the available options. Although the Treasury challenged the underlying assumptions used by external advisers, it should be in a position to validate the analyses prepared for it, particularly in fast moving situations where crucial decisions have to be taken quickly. To this end, it should draw where appropriate on expertise from within the Treasury or from expertise available elsewhere in the public sector, such as in Partnerships UK.
h The contract with Goldman Sachs included a discretionary "success" fee, which the Treasury and Goldman Sachs ultimately agreed was not appropriate in the circumstances. Where consultants are appointed at short notice to help with a crisis situation, a robust contract should be put in place at the earliest opportunity. Where a "success" fee is provided for, Departments should agree the criteria by which success is to be determined. If the objectives cannot be adequately specified at that stage, the Department should as in this case stipulate that the payment of such a fee will be at its discretion.
i There were weaknesses in the Treasury's management of electronic records. The Treasury should put in place adequate arrangements for filing, storing and accessing the electronic and paper records generated. The Treasury should consider whether its working processes and IT infrastructure is capable of supporting the demands of such a project and take action to address any shortcomings.