Industry boss blasts bank system

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The head of the CBI employers' group, Richard Lambert, has criticised the tripartite system designed to underwrite financial stability.

He said it had been "found wanting under fire" in the Northern Rock crisis and "tarnished" the UK's reputation.

And he described the run on the bank as what would be expected "in a banana republic", rather than a "mature and prosperous country".

However, Mr Lambert did not blame any individuals for events.

'Drama'

Mr Lambert was speaking at the CBI North East annual dinner in Newcastle, where Northern Rock has its headquarters.

We do know enough to say that the crisis has not been well handled by those responsible Richard LambertDirector-General, CBI <a class="" href="/1/hi/business/7012655.stm">What future for regulators?</a>

And while he accepted that the bank was to blame for getting its business model wrong, he said that people in the region had been "badly let down".

"Other financial institutions around the world have been buffeted around in this rough weather. Few of them have been holed.

"We don't yet know the detail of who said what to whom as the drama unfolded over the summer," he said.

<a class="bodl" href="#graph">See a chart of the current system of financial regulation</a>

"But we do know enough to say that the crisis has not been well handled by those responsible: the government and the city authorities."

The current system was set up by Gordon Brown when he first became chancellor in 1997.

Under the tripartite system, the Financial Services Authority supervises the banks, the Treasury is responsible for legislation and the Bank of England for financial stability.

This meant that the Northern Rock was supervised by the FSA, but when it ran into trouble, it sought help from the Bank of England.

The Northern Rock is an important part of North East life

However, initially the Bank of England was not keen to inject cash into the financial markets to save the bank.

Mr Lambert said the system needed to be overhauled, and the "lender of last resort" process to be reassessed, if any business were to have the confidence to go down that route again.

And he did not favour Chancellor Alistair Darling's call for a return to "good old-fashioned banking" - a reference to a more cautious approach to lending.

Outside the movies, a run on a bank is something that happens in a banana republic Richard Lambert <a class="" href="http://news.bbc.co.uk/1/hi/in_depth/business/2007/creditcrunch/default.stm">Credit crunch: Special report</a>

Instead he called for a return to "good old-fashioned banking supervision... a world where you know beyond doubt who is in charge when trouble hits, and where that person has the power to do whatever is necessary - however brutal - to nail down trouble before it gets out of hand."

'Weakened trust'

Mr Lambert added he was unsure Northern Rock could continue to "play the same positive role in the region as in the past".

"It will take more than a few months to erase the memory of those respectable Northern Rock depositors patiently queuing to withdraw their funds," he said.

"Those images will have weakened the public's trust in our financial system - trust on which much of our future economic well-being depends.

"The reputation and standing of the UK as a world financial leader has been tarnished.

"Outside the movies, a run on a bank is something that happens in a banana republic.

"That one should have happened under our noses, in a mature and prosperous country like the UK, is almost unimaginable."