| FSA blamed for Northern Rock fiasco |
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| Saturday, 26 January 2008 | |
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Page 2 of 2 Stopping the run The committee has come to the conclusion that Chancellor Alistair Darling was right to view Northern Rock as posing a systemic risk to the financial system and to authorise the Bank of England's support facility. It adds, however, that the Tripartite authorities did not prepare adequately for that support operation. “Those authorities and Northern Rock ought to have strained every sinew to finalise the operation and announce it within hours rather than days of the decision to proceed with the operation,” the report claims. The Tripartite authorities at deputies level failed to plan in advance for the announcement of the Government guarantee on Northern Rock deposits that proved necessary to stop the run, according to the committee. The Bank of England comes under attack in the 179-page report for failing to take a more proactive approach and accepting a wide range of collateral at a later stage than their European counterpart. The committee accepts that the feverish media speculation over Barclays Bank's emergency lending two weeks earlier made both covert and overt large scale financial assistance for UK banks a risky business. It says, however, that the authorities had no scenarios ready to deal with a crisis at an earlier stage. Dealing with failing banks The Treasury Committee recommends a series of measures for handling 'failing' banks in an orderly manner and in a way that insulates taxpayers and small depositors from the risk of banks failing. These include a recommendation that a relevant authority be given power to acquire information relating to individual financial institutions and to take action in relation to an institution in specified circumstances. The committee also proposes a special resolution regime for failing banks to enable smooth administration of such a bank to be combined with arrangements to ensure that insured deposits are safe and accessible. "We are concerned that banks and building societies appear to be viewing the Government's support to Northern Rock as an acknowledgement that no bank would be allowed to fail. The Government must take steps to ensure that its framework for maintaining financial stability does not provide free insurance to banks," the committee members say. They add that they do not believe that a deposit protection scheme should apply solely to the very smallest institutions. All banks and building societies should be covered by a deposit insurance scheme, such that, in cases such as Northern Rock, or an even larger bank, the Government would not be required to step in to protect depositors. Depositor protection The report says that a deposit protection scheme must be simple and transparent. It concludes that the "co-insurance" model of deposit protection, whereby small depositors stand to lose some of their money in the event of a bank closing, is discredited. “Ensuring the speedy release of funds under any scheme is of critical importance, and we propose measures to provide for this. We recommend the establishment of a Deposit Protection Fund to be funded by participating institutions,” McFall says. Lessons learned He adds that there was a significant failure of the Tripartite arrangements in September 2007, and that lessons must be learned from that failure. The committee concluded that the UK’s financial system would not be well-served by a dismantling of the Tripartite arrangements, introduced by Gordon Brown. The current arrangements lack a clear leadership structure or a strategy for effective communication with the public, however, in their view. Reforms The report concludes that a single authority ought to be given the new powers for handling failing banks, together with responsibility for the Deposit Protection Fund. It says that there is a need for 'creative tension' within the regulatory system. The committee recommends that these powers and responsibilities should not be granted to the Financial Services Authority. “A lesson to be learnt from this crisis is that the auditor can only provide an assurance of a snapshot of the past state of the company,” McFall says. He recommends that the accounting bodies consider what further assurance auditors should give to shareholders in respect of the risk management processes of a company, particularly where a company is regarded as an outlier. Auditor conflict of interest The MPs are also concerned that there appears to be a particular conflict of interest between the statutory role of the auditor, and the other work it may undertake for a financial institution. PricewaterhouseCoopers received £700,000 in non-audit fees, for example, largely comprised of fees relating to assurance services in connection with Northern Rock's actions in raising finance. The Treasury Committee proposes the creation of a new post of deputy governor of the Bank of England and head of financial stability. The report sets out how this new post and the accompanying office will relate to the existing responsibilities of the Bank of England and to the other Tripartite authorities. The Financial Services Authority said in response to the committee's report that there were "clearly" supervisory failings in relation to Northern Rock and that it was already addressing these. It added that it would also examine carefully any further lessons that emerge from its internal review of the supervision of Northern Rock, the results of which are expected to be published in March. "We intend to study carefully the committee's report and will respond more fully in due course. The report will inform our input into the Tripartite Authorities' wider consideration of reform, which is currently underway," the FSA concluded. Critical issues The British Bankers' Association (BBA) said that the Treasury Select Committee’s report raised many critical issues which Government, regulators and the banking sector need to work together to address. It added that this would need similarly informed dialogue to bring about sustainable long term solutions: not quick fixes made in haste. "We hope next week’s H M Treasury white paper on the banking industry builds on the Treasury Select Committee’s proposals and will develop, in full discussion with the industry, solutions which protect customers and ensure the success of the UK banking sector which contributes £50 billion each year to the economy and directly employs almost half a million people," a BBA spokesman added. The BBA called for a period of serious discussion with the industry about how to restore its reputation. 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