October 9, 2007 / 10:38 AM / 13 years ago

FSA defends record on Northern Rock

LONDON (Reuters) - The Financial Services Authority, under fire over the near-collapse of Northern Rock, defended its role, but said it could have moved earlier to check the lender was testing its resilience to a liquidity crunch.

Shoppers pass a branch of Northern Rock in Kingston in London September 15, 2007. The Financial Services Authority, under fire over the near-collapse of Northern Rock, defended its role, but said it could have moved earlier to check the lender was testing its resilience to a liquidity crunch. REUTERS/Luke MacGregor

The financial watchdog, responsible for policing banks, is facing the biggest crisis since it was set up seven years ago, accused along with other regulators of failing to do enough to prevent the first run on a UK bank in over a century.

“I do not think we have failed in our supervisory duty. I think we have discharged our duties,” FSA Chairman Callum McCarthy told parliamentarians investigating the crisis, during a gruelling hearing that lasted well over two hours.

He confirmed the FSA — which regulates the banking system along with the Bank of England and the finance ministry — was looking at reforms following Northern Rock’s troubles, in areas including guarantees on savings, already under review, and insolvency laws which currently freeze deposits.

“We believe that there are lessons to be learnt, which we are identifying and will apply, in respect to the supervision of Northern Rock, but... we cannot run and do not run a zero failure regime,” McCarthy told the Treasury Committee.

The FSA dismissed accusations it should have expected problems at Northern Rock after the bank saw a jump in its share of the mortgage market in the first half — growth some now say should have hinted at the fragility of its business model — but said it could have done more to press the bank on its resilience.

“The intensity of that dialogue — at the time of (a February 2006) visit and subsequently — should have been more forceful. Those points were being identified by July, when we were engaging in discussions on their stress-tests, but obviously at that point in time, events overtook the firm,” Chief Executive Hector Sants told the hearing.

“Let’s remind ourselves, it is the board’s responsibility to run the company prudently. But ... we should have been in more intensive discussions with the company earlier.”

“GOOD AND CLEAR RELATIONS”

The FSA told the committee Northern Rock’s assets were not troubled, and said the bank was not pushed to the brink by the failure to raise funds on wholesale markets — a widespread perception — but by the shortening of terms that pushed it to seek a safety net from the central bank.

“It did not actually fail to fund itself — maturities shortened back into the overnight period, to the point the board thought it prudent to seek the lender of last resort facility,” Sants said. “They needed the insurance of opening up a facility with the Bank of England. They would not have had to use that facility had there not been the retail run.”

He added that the bank was not unusual in its use of short-term funding, with a far greater risk lying in its reliance on wholesale markets, primarily securitisation.

Critics of the tripartite regulation of the banking sector say its flaws became apparent as Northern Rock’s troubles prompted furious buck-passing over who should take responsibility.

But the FSA’s chairman refused to be drawn into the debate on Tuesday, denying relations between itself and the central bank turned “poisonous” after reports — quoting unnamed officials — blamed the Bank for the crisis.

“If I knew of anyone within the FSA (briefing on) this I would fire them,” he said, denying FSA involvement.

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