A LLOYDS TSB rescue of Northern Rock could have stabilised the UK banking system, the bank's former audit committee chairman Ewan Brown has said.

Mr Brown, who chaired the committee between 2002 and 2009, has confirmed that the Bank of England and Treasury refused to underwrite a Lloyds rescue bid just before Northern Rock crashed in September 2007.

"We should have been allowed to buy Northern Rock," Mr Brown said.

"It would not have averted the crisis, but the year that followed Northern Rock was a continued year of excess, and if the issue had been gripped in a different way, it probably would have helped the whole regulatory system."

On the sales culture at Lloyds, which has led to the bank so far making provisions of £7.3 billion for the mis-selling of payment protection insurance, Mr Brown said: "The basic banking product was relatively unprofitable, selling insurance began to be a reasonably profitable line, and the FSA knew this was happening.

"The pity, perhaps, is none of the banks were able to take a lead during a really boom period.

"Charging fees would have been the way to do it, rather than free banking, and I can remember this being debated quite frequently at Lloyds."

Mr Brown said: "The day Lehmans went bust, as chairman of the audit committee I asked for a schedule of all our off balance sheet exposure, everything we had, I got the list at half past nine next morning.

"Lloyds knew exactly what the exposures were, I headed that committee for seven years and never had a single surprise."