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Northern Rock saga rumbles on as UK inquiry into central bank bail-out widens and moves closer to Prime Minister

LONDON (Bloomberg) - British lawmakers are widening the scope of their inquiry into the Northern Rock Plc. bailout to assess the actions of the Financial Services Authority and the Treasury, bringing political blame closer to Gordon Brown.

Parliament's Treasury Committee said it will call Chancellor of the Exchequer Alistair Darling and FSA chairman Callum McCarthy to testify about how they worked with the Bank of England in the days before the run on deposits held by the mortgage lender.

Brown, who became prime minister in June after serving a decade as finance minister, established the current financial framework where the central bank sets interest rates, the FSA supervises banks and the Treasury controls taxpayer funds. Lawmakers from all political parties said the 1997 arrangement, known as the Tripartite Agreement, works poorly.

"On the shelf it looked like a Rolls-Royce, but it's turned out to be an old banger," John McFall, a member of Parliament for the ruling Labour Party and chairman of the Treasury Committee, said in an interview.

The committee said in a statement that it will take testimony from McCarthy on October 9. Darling is likely to make a statement when the House of Commons returns from its recess that week and appear before the committee later.

A credit squeeze caused by the collapse of the subprime mortgage market in the US forced Northern Rock to seek an emergency loan from the central bank last week, prompting savers to line up for three days to withdraw deposits.

"It was a tripartite cock-up," said Grant Lewis, an economist at Daiwa Securities SMBC Europe. "I don't think any of the institutions have performed particularly well in this."

Bank of England Governor Mervyn King, defending his role in the bailout, said British and European Union laws hampered the central bank's ability to act and that it was the FSA that was responsible for assessing the financial health of Northern Rock.

"Someone has got to be in charge overall of the tripartite arrangement," said Michael Fallon, a Conservative Party lawmaker on the committee.

"Not one of them had made the connection with what was happening in the US and Northern Rock, and they should have. That's what they are paid to do."

The Conservative Party said it wanted to work with the government on legal changes to strengthen the financial system. The Treasury already is considering how to bolster the UK bank deposit insurance plan, which currently protects about £31,700 of savings.

The opposition also is questioning whether Treasury ministers had their attention on the emerging credit problems from the US in the last few months.

After Tony Blair announced his resignation in May, Brown focused on his campaign to lead the ruling party. He appointed a new team of Treasury ministers on June 28. Of those, only Darling had any experience at the finance ministry.

"Has this crisis in part arisen because for the past year or so Gordon Brown has been plotting his takeover as prime minister, instead of doing his primary job, which is ensuring the stability of the banking system?" Philip Hammond, a Conservative member of Parliament who speaks for the party on Treasury matters, said in an interview. So far, the government has refused to discuss changing the tripartite structure.

"The important issue for now is to focus on restoring stability in the financial system," Brown's spokesman Michael Ellam said.

After managing the longest period of growth in two centuries, Brown's Labour government now faces criticism from economists and rival parties who say it and the Bank of England could have prevented the run on Northern Rock deposits.