The ‘lessons to learn’

Oct 10 2007 by Matthew Mckenzie, The Journal

BRITAIN’S financial services regulator yesterday admitted there were “serious lessons” to learn after the run on Northern Rock.

Bosses at the Financial Services Authority (FSA) said it needed to improve monitoring and appeared to suggest the run on the Newcastle bank last month might have been avoided.

The Commons Treasury select committee was told Northern Rock had not been due a full risk assessment until three years after its last one, conducted between December 2005 and February 2006.

FSA chief executive Hector Sants said specific issues were addressed on a regular basis but said it should have been in “more intensive” dialogue with the Rock earlier.

“There are lessons to be learnt here with regard to our supervisory practice and I think we do need to look back over our engagement with this particular company,” said Mr Sants.

And the FSA had assessed Northern Rock as being a “high impact” organisation but with a low probability of getting into difficulty, he added.

“There is no question of course that the way events transpired that probability analysis has been proved to be incorrect.

“So we have some serious lessons to be learnt in terms of the way we went about measuring our probability,” said Mr Sants.

Mr Sants and FSA chairman Sir Callum McCarthy insisted they were not alone in failing to predict the bank’s difficulties sparked by “highly unusual” circumstances in money markets.

They also sought to defend their handling of the Northern Rock crisis which emerged in August and led to the bank having to seek emergency support from the Bank of England last month.

Sir Callum said the speed of the response was “perfectly reasonable” between it receiving a memo on August 1 warning of potential problems and alerting the Treasury and Bank of England on August 14.

In that time, the FSA said it held regular discussions with Northern Rock and monitored its liquidity – with significant deterioration in the bank’s position not happening until after August 14.

The company also had a good loan book and the FSA has no evidence that it was offering mortgages out of line with quality market delivery.

But Mr Sants said the situation worsened in September after a private sector solution, including potential underwriting by other banks and a possible takeover, could not be found.

He said Northern Rock was funding itself, but was right to seek assurance through a Bank of England facility as it came under pressure from a “credit crunch” on the international money markets.

“We need to look at this as a set of circumstances, which included the retail run as a major driver of their problems. They were not using the Bank of England facility until the retail run,” said Mr Sants.

And he agreed on the “narrow point” in relation to Northern Rock when asked whether the Bank of England pumping cash into the money markets earlier could have avoided the queues of anxious customers outside branches.

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Let’s all rally around Rock

MAKE sure everyone you know joins our campaign to support the Rock

The Journal is calling on the region to rally around Northern Rock, asking members and supporters of all those organisations which have been helped by Northern Rock and its foundation, as well as our readers and the wider North-East community, to demonstrate their faith and confidence by opening an account with Northern Rock.

You can do it for just £1, or as much as you like.

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