Northern Rock danger missed by watchdog

Mar 26 2008 by William Green, The Journal

BANK regulators are today expected to admit failings over Northern Rock amid claims they focused too much on consumer issues rather than the security of the company.

The Financial Services Authority is expected to say a focus on customer protection may have been at the expense of checking the viability of banks’ business models, heavily criticised in Northern Rock’s case.

The FSA could also call for beefed-up resources to improve monitoring of banks in its own report about its handling of the Northern Rock crisis as it strives to implement changes after the affair.

But it is not expected to demand radical reforms to the much-criticised regulatory system introduced by Gordon Brown, combining the FSA, the Treasury and Bank of England.

And it is unlikely to call for an inquiry into Northern Rock’s ex-bosses amid claims the bank’s old business model depended too heavily on raising cash in money markets that subsequently seized up.

Newcastle Central MP Jim Cousins, who sits on the Commons Treasury Select Committee, said the FSA was too heavily focused on the relationship between customers and banks rather than looking at how institutions raised cash for mortgages in the first place.

“The FSA was looking, if you like, at the front-end rather than the back-end of the banks, how they raised the money and the risks they might have taken,” he said.

He said “stress testing” focused on mortgage-holders being unable to repay money rather than banks’ ability to raise funding to make loans in the first place.

“As 2007 went on, they should have been stepping up monitoring of banks’ activities in the markets and that is the error I think they are going to confess to and put right.

“And we will see what comes out of that because there are some quite difficult technical issues,” said Mr Cousins.

He said controversy over penalty bank charges could be an example of too great a-focus on consumer issues. There would be a time for a “thorough investigation” of Northern Rock’s former board and directors, but he stressed that was not now, when the priority was to rebuild the business.

Liberal Democrat Treasury spokesman Vince Cable said the bank’s problems lay with its former bosses, although the FSA recognised it had “made a mess of it”.

He said there could be questions over the future of FSA chairman Sir Callum McCarthy if it was a scathing report.

The Consumer Action Group, which campaigns on penalty bank charges, said the FSA and OFT had failed as regulators.

The FSA said there were no plans for Sir Callum to leave before September after serving one term in the post as planned.

Commons Treasury committee chairman John McFall said the FSA must learn the lessons of its Northern Rock failures and have the staff and expertise to supervise banks properly.