The Treasury was caught unprepared to deal with mortgage lender Northern Rock's failure in September 2007, MPs have said.

The department was attacked by The Public Accounts Committee (PAC) for not being ready to deal with a bank in crisis despite warning signs appearing as early as 2004.

PAC chairman Edward Leigh warned: "The Treasury must never again be so ill-prepared. As this crisis has shown, the Treasury's ability to respond effectively to future financial crises must be maintained at the highest level."

Northern Rock was the first UK bank that was hugely affected by the recession and was nationalised in February 2008 after being helped by The Bank Of England with around £27 billion in emergency loans.

MPs have been forced to respond after The National Audit Office (NAO) published a damning report in May.

The spending watchdog revealed the bank was offering a Together mortgage, which allows people to lend up to 125% of the value of their home, at a time when the bank knew it was in trouble and was being given emergency support. It also accused the bank of offering the service right up until it was on the brink of nationalisation.

The Treasury was also said to have challenge business plans that were over-optimistic, properly assess risks and carry out its own due diligence after the bank was nationalised.

Mr Leigh added: "The taxpayer was exposed to enormous risks and liabilities to an unknown degree."

The PAC also revealed that in 2007 the 60 staff in the Treasury that were working on financial stability issues were working at a "leisurely" pace while they were working on measures to deal with a struggling bank.

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