British regulator admits failings in Northern Rock fiasco
LONDON, March 26, 2008 (AFP) — Britain's top financial services regulator admitted Wednesday to serious failings in its oversight of Northern Rock, the British bank that needed a government bailout to save it from collapse last year.
The Financial Services Authority (FSA), responsible for regulating London's City financial district, said in a statement on Wednesday that an internal review had exposed a series of mistakes in the run-up to the fiasco.
Northern Rock lurched into crisis in August, when it sought emergency central bank funds because of the credit squeeze, and was taken into public hands last month after the government could not find a private sector buyer.
The internal FSA review found that regulation of the bank "was not carried out to a standard that is acceptable" and had failed to monitor Northern Rock's risk management closely enough.
The FSA vowed to overhaul its oversight of Britain's main commercial banks, with closer and improved supervision that would be regularly reviewed and would focus on liquidity requirements.
Northern Rock was brought to the brink of collapse when it could not raise funds on credit markets to cover its liabilities and depositors beseiged the retail bank's branches in September to withdraw their savings.
It was the first run on a British bank in more than a century.
The FSA said Wednesday that it had been guilty of insufficient "supervisory engagement" with Northern Rock in the run-up to the crisis in late 2007.
It stressed that its supervisory team had failed "to follow up rigorously with the management of the firm on the business model vulnerability arising from changing market conditions."
Records of key regulatory meetings with Northern Rock were not kept, the review also found.
The FSA added that it would seek to improve the so-called "tripartite" structure of financial regulation -- comprising the FSA, the Bank of England and the government's powerful Treasury department.
The global credit crunch, which erupted last August and resulted from the collapse of the US subprime home loans sector, forced Northern Rock to request emergency funding from the Bank of England.
The Financial Services Authority and the tripartite system have been heavily criticised for perceived failings that failed to identify potential problems at Northern Rock.
The FSA's director of internal audit, Rosemary Hilary, said Wednesday that reform to the watchdog would ensure that in future there was "good record-keeping, good information flows ... and the right amount of engagement and supervision of front-line staff by management."
FSA chief executive Hector Sants added: "It is clear from the thorough review carried out by the internal audit team that our supervision of Northern Rock in the period leading up to the market instability of late last summer was not carried out to a standard that is acceptable, although whether that would have affected the outcome in this case is impossible to judge.
"However, I am determined through the programme of work that I am announcing today, that proper standards will apply to all significant firms supervised by the FSA," Sants added in the statement.
Last week, the American subprime housing crisis and related credit crunch claimed the scalp of Bear Stearns, the fifth largest investment bank on Wall Street.
