TREASURY bungling over Northern Rock continued even after the stricken bank was finally nationalised, a report by MPs says today.

Chancellor Alistair Darling’s officials “did not challenge with sufficient rigour” the Rock’s over-optimistic forecast for bouncing back after the taxpayer bailed it out, said the Public Accounts Committee.

A business plan was approved that assumed a house price fall of five per cent last year – even though external forecasts at the time had predicted “large falls”.

The actual fall was 13.5 per cent and as a result, Northern Rock lost £585m in the first six months of last year – more than twice the £271m forecast.

Edward Leigh, the committee’s Tory chairman, said: “When the Treasury nationalised the bank, in February last year, it did not carry out its own due diligence on the quality of the Rock’s loan book.

“Nor did it sufficiently challenge the company’s unrealistic forecast that house prices would remain much the same up to 2012.”

The conclusion adds to familiar criticisms about the Northern Rock disaster – in particular, that the Treasury ignored warnings, from as long ago as 2004, that it was unprepared for a bank crash.

The committee concluded that officials were “caught flat-footed” when, in September 2007, there was the run on deposits at the Newcastlebased lender, triggering the now infamous queues.

The report also repeated criticisms that Northern Rock continued to award its highrisk “Together” loans – offering 125 per cent mortgages – even while the Treasury was “pouring in billions to stabilise the bank”.

And it highlighted how “very few people within the Treasury had the relevant skills to deal with the crisis”

– forcing it to spend £26.8m on consultants.

Mr Leigh concluded: “The Treasury’s lack of preparedness for dealing with the failure of a major bank was evident as early as 2004, but nothing much was done to remedy this weakness.

“The Treasury must never again be so ill-prepared. This involves making sure that, in future scenario testing, action is swiftly taken to deal with any shortcomings that emerge.” Nevertheless, the report agreed that the eventual decision to nationalise Northern Rock was “the best alternative in terms of value for money”.

Since then, the Government has performed a U-turn to allow the bank to delay repaying the £27bn it borrowed from the Bank of England later than 2011.

Instead, Northern Rock will be turned into a “good bank”

– resuming its role as a big player in the mortgage market, to tackle the problem of a slump in lending and even possibly taking on extra staff.

However, controversy continues to rage over the zero-return compensation scheme for former shareholders – which was attacked in court this month as “unlawful, unfair and manifestly disproportionate”