The Northern Rock bail-out was formally a joint decision of the UK Treasury, the Financial Services Authority and the Bank of England. However, their Memorandum of Understanding (MOU) states that “ultimate responsibility for authorisation of support operations in exceptional circumstances rests with the chancellor [of the exchequer]”. This makes sense: the taxpayer is on the hook when public resources are put at risk. Unfortunately, it is the Bank’s reputation that is damaged. It had to provide credit after the governor took a strong public stand against bail-outs.

Following rapid expansion financed by high-risk funding, Northern Rock depended on the government to survive. Three-quarters of its funds came from the wholesale markets instead of depositors. When global financial turmoil hit, Northern Rock could no longer refinance its maturing obligations. It had engaged in reckless borrowing; it gambled and lost. Now it must find itself a buyer with deeper pockets. That the government bailed it out is hard to understand. The MOU states that a bail-out should only be undertaken if there is, “a genuine threat to the stability of the financial system”. The demise of the fifth-largest UK mortgage lender would hardly be a systemically significant event.