Rock report names the ‘guilty’ parties
Jan 26 2008 by William Green, The Journal
NORTHERN Rock bosses, the Chancellor and the Financial Services Authority will all come under fire today in a report apportioning blame for last year’s run on the bank.
The Commons Treasury Committee will say the bank is vital to the North-East in terms of thousands of jobs and the Northern Rock Foundation, but have hit out at the tripartite regulation system made up of the Treasury, Financial Services Authority (FSA) and Bank of England.
The Bank of England comes under fire for failing to act sufficiently in August to unfreeze the credit market, while the Financial Services Authority city watchdog is also said not to have done its job.
A delay by Chancellor Alistair Darling in guaranteeing customer deposits also “prolonged“ the run on the bank by panicked customers last September, the MPs said, and was “more damaging to the health of the company than might otherwise have been the case”.
In a blistering report, MPs hit out over communication failings by the tripartite authorities – particularly in relation to preparations for last September’s support operation for Northern Rock.
The Newcastle-based bank owes the Bank of England about £24bn after soaring borrowing costs forced it to seek a funding bail-out, triggering the first run on a UK bank since Victorian times.
The possibility of an operation was raised on September 10 and discussed at a high level by the Bank of England and Northern Rock the next day, with the date of a public announcement fixed for the following Monday. But a leak on September 13 scuppered those plans and the authorities were forced to make an announcement the following day.
MPs said the authorities and Northern Rock should have “strained every sinew” to finalise a deal and announce it within hours, rather than waiting.
“The cumulative effect of these failures was to delay the guarantee until the evening of the fourth day after the run started and thus to make the run on the deposits of Northern Rock more prolonged, and more damaging to the health of the company, than might otherwise have been the case,” said the report.
The Northern Rock board also came under heavy criticism with MPs accusing them of being the “principal authors” of the bank’s woes.
The committee expressed regret for shareholders’ losses, but warned they had taken a risk to seek reward and were now paying a price.
Newcastle Central MP Jim Cousins said the report raised very serious issues about the board of Northern Rock, the FSA and Bank of England. “It amounts to being an expression of no confidence in the way the three bodies behaved,” said the member of the Commons Treasury committee. Mr Cousins added the Government could be criticised for failing to get into the details of the situation and warned of a “serious misjudgment” in the handling of the Bank of England support operation.
Berwick MP Alan Beith accused Gordon Brown of failing to introduce a sufficient system to cope with such crises and agreed with criticism of the Northern Rock board. He said: “If you go around the bend at 80mph and hit something, it is no use saying the police should have stopped me.”
MPs now want a beefed-up role of Bank of England deputy governor and head of financial stability – backed by Treasury and FSA staff – to act as the Chancellor’s main adviser on potential crises.
Measures for handling banks at risk of failure to protect taxpayers and small depositors should also be introduced, said the report.
Last night Robin Ashby, of the Northern Rock Small Shareholders Group, said: “I welcome this report by the Court of Parliament. It brings rapidly to the attention of the authorities their own ‘Contributory Negligence’ in the collapse of Northern Rock and is justification, if any further were needed, in the continuing role of the Government and taxpayer in ensuring that the bank is able to restructure itself and go forward.”
