Danger warnings missed by watchdog

Apr 30 2008 by William Green, The Journal

BOSSES at Britain’s financial watchdog had a damaging “lack of knowledge” of Northern Rock, with no senior manager apparently overseeing the bank before it hit trouble, it emerged last night.

The Financial Services Authority (FSA) should also have picked up warning signs over Northern Rock as early as 2006, according to further details released from an internal report published last month.

Last night, Newcastle Central MP Jim Cousins – who sits on the Commons treasury committee – slammed the FSA’s “pathetic” regulation over a crisis that could have been avoided.

Northern Rock was forced to seek emergency Bank of England support last autumn as key funding from money markets dried up amid the credit crunch, leading to its nationalisation this year and an immediate threat to 2,000 jobs.

The details in the FSA report yesterday revealed further failings in how it oversaw the Newcastle-based lender in the run-up to the crisis.

There was no head of the relevant FSA department monitoring the bank for around a month in 2006 and three months between May and August last year. Regular FSA overhauls shifted responsibility for Northern Rock to three different departments between 2004 and 2007. “The frequent changes led to a lack of knowledge of Northern Rock by the senior management team,” added the FSA report.

And Northern Rock was not monitored enough despite being a “high impact firm pursuing an aggressive strategy”, with insufficient resources a factor.

A visit to Northern Rock in February 2006 identified areas needing action, but no “risk mitigation programme” (RMP) was required despite the Rock previously being subject to one.

A letter to the bank’s board on March 13 2006 confirmed no RMP was required with the firm posing a “low” risk – although a presentation to Rock bosses on March 28 described it as “medium-low” risk in an unexplained “anomaly”.

Strains were apparent in the bank’s half-year results, published in July 2006 and 2007, which warned of the higher cost of borrowing from other banks – a key issue in the credit crunch.

“We regarded these consequences as foreseeable given the nature of Northern Rock’s business model,” said the report.

A review of the bank should have also been triggered by “signals” such as the Rock’s ambition to become the UK’s third largest mortgage lender.

The bank’s lending rocketed by 34% in the first quarter of last year and it opened a Danish savings bank to diversify funding in February 2007. But there was no detailed FSA assessment of Northern Rock’s funding strategy before the second quarter of 2007.

Newcastle Central Labour MP Jim Cousins said: “It is fairly clear now that somebody should have spotted all of that and done something.”

Location blamed for problems

THE Financial Services Authority report blamed part of Northern Rock’s problems on it not being based in London.

The internal report said the Newcastle-based bank’s executive team was a largely home-grown and long-standing team – highlighting how former chief executive Adam Applegarth had been with the firm since 1983.

“We believe that this lack of wider market experience had the potential to weaken management’s effectiveness in key areas,” said the report.

It added: “We believe this becomes more important if geographic location means staff do not have frequent opportunities to mix, formally and informally, with counterparts from other firms.”

Newcastle Central MP Jim Cousins said a London-centric system had failed to look after a situation in the North East of England.

“The Bank of England, the Treasury and FSA all sat in London and failed to take the action that they could have taken to head all of this off,” said the Labour MP.

The FSA and Northern Rock declined to comment on details of the report, although the watchdog has promised improved regulation.