The Treasury has been criticised by MPs for being caught "flat-footed" by the failure of Northern Rock.

The department had been aware for three years that there were gaps in its ability to help a bank in difficulty but had done nothing about it, a report from the public accounts select committee said on Thursday.

Along with the Bank of England and Financial Services Authority, the Treasury had run a test in 2003 and identified gaps in the statutory framework protecting depositors but by 2007, when Northern Rock got into difficulties, the Treasury had still not made plugging those gaps a priority.

Select committee chairman Edward Leigh said: "Nothing much was done to remedy this weakness. It is not surprising therefore that, in September 2007, when there was the run on deposits at Northern Rock, the Treasury was caught flat-footed."

The MPs' report, based on work carried out by the National Audit Office (NAO) earlier this year, revealed that there were "very few" people based in the Treasury who had the right skills to deal with the Northern Rock crisis.

As a consequence it used external advisers extensively, but a fee structure for Goldman Sachs advisers, for example, was not agreed until four months after they had started work. Even once it was agreed, there was no definition of success, MPs noted.

"The Treasury must never again be so ill-prepared," said Leigh. "As this crisis has shown, the Treasury’s ability to respond effectively to future financial crises must be maintained at the highest level. This involves making sure that, in future scenario-testing, action is swiftly taken to deal with any shortcomings that emerge."

The select committee has also criticised the way the Treasury handled Northern Rock once it was receiving financial support.

Leigh said: "Even though the Treasury was pouring in billions to stabilise the bank, Northern Rock was allowed to carry on awarding high-risk loans to the tune of £750m.

"And, when the Treasury nationalised the bank in February 2008, 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 committee, and the NAO, did back the Treasury's decision to nationalise the bank as, Leigh said, it was "based on a comprehensive assessment of the options available to it" and "represented the best alternative in terms of value for money".

A Treasury spokesman said: "Both the public accounts committee and the National Audit Office have found that we took the right decision to protect depositors and taxpayers, and put the bank on a sound and proper footing.

"The consequences of not taking this action would have been devastating, not just for savers but for the wider financial system and the economy as a whole."