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FSA 'failed over Northern Rock' FSA 'failed over Northern Rock'
(about 1 hour later)
The Financial Services Authority is guilty of a "systematic failure of duty" over the Northern Rock crisis, a key parliamentary committee has said.The Financial Services Authority is guilty of a "systematic failure of duty" over the Northern Rock crisis, a key parliamentary committee has said.
The Treasury committee said the UK's financial watchdog should have spotted the bank's "reckless" business plan.The Treasury committee said the UK's financial watchdog should have spotted the bank's "reckless" business plan.
To help prevent any further crisis, the report calls for the Bank of England to set up a head of financial stability.To help prevent any further crisis, the report calls for the Bank of England to set up a head of financial stability.
The FSA said it had already admitted failings in relation to Northern Rock and was "addressing" them.The FSA said it had already admitted failings in relation to Northern Rock and was "addressing" them.
"We will also examine carefully any further lessons that emerge from our internal review of the supervision of Northern Rock," it said in a statement."We will also examine carefully any further lessons that emerge from our internal review of the supervision of Northern Rock," it said in a statement.
'Credit crunch''Credit crunch'
Committee chairman John McFall said Northern Rock's directors were primarily to blame, but added that financial stability safeguards "failed abysmally".
"Northern Rock had only one well from which to drink, and the FSA should have realised that," he said.
"It was a failure of the regulator not to see systemic risk."
Northern Rock has been given £25bn of emergency Bank of England loans.Northern Rock has been given £25bn of emergency Bank of England loans.
The failure of Northern Rock, while primarily a failure of its directors, was also a failure of its regulator Treasury Committee chairman John McFall Rock report: key quotesMPs call for new bank boss It's probably one of the most damning reports that any select committee has put out in recent times Philip HammondShadow chief secretary to the Treasury Rock report: key quotesMPs call for new bank boss
The funds - which are, in effect, taxpayers' money - have been given to Northern Rock since last September.The funds - which are, in effect, taxpayers' money - have been given to Northern Rock since last September.
The Newcastle-based lender got itself into financial difficulties because its unique business model left it ill-prepared for the global credit crunch.The Newcastle-based lender got itself into financial difficulties because its unique business model left it ill-prepared for the global credit crunch.
Unlike the great majority of UK banks, Northern Rock relied upon borrowing funds from the wholesale money markets to fund its mortgage business, rather than the usual method of using savers' deposits.Unlike the great majority of UK banks, Northern Rock relied upon borrowing funds from the wholesale money markets to fund its mortgage business, rather than the usual method of using savers' deposits.
Northern Rock found it was cheaper to do it this way and as a result, it was able to expand its mortgage business rapidly.Northern Rock found it was cheaper to do it this way and as a result, it was able to expand its mortgage business rapidly.
Yet when the credit crunch hit, Northern Rock suddenly found it could not secure the cheap funds it needed, as credit was either unavailable or markedly more expensive.Yet when the credit crunch hit, Northern Rock suddenly found it could not secure the cheap funds it needed, as credit was either unavailable or markedly more expensive.
As the first emergency loan from the Bank of England was announced, thousands of Northern Rock savers rushed to withdraw their funds, before the government's pledge to guarantee all savings.As the first emergency loan from the Bank of England was announced, thousands of Northern Rock savers rushed to withdraw their funds, before the government's pledge to guarantee all savings.
READ THE REPORT The run on the Rock [922KB] Most computers will open this document automatically, but you may need Adobe Reader Download the reader hereREAD THE REPORT The run on the Rock [922KB] Most computers will open this document automatically, but you may need Adobe Reader Download the reader here
The tripartite Treasury Committee report said the Financial Services Authority (FSA) had failed to "stress-test" Northern Rock's business model sufficiently.The tripartite Treasury Committee report said the Financial Services Authority (FSA) had failed to "stress-test" Northern Rock's business model sufficiently.
"The failure of Northern Rock, while primarily a failure of its directors, was also a failure of its regulator," said committee chairman John McFall.
"The FSA did not supervise Northern Rock properly."
The report also said the UK's tripartite financial authorities - the FSA, the Treasury and the Bank of England - were insufficiently prepared to deal with Northern Rock's difficulties.The report also said the UK's tripartite financial authorities - the FSA, the Treasury and the Bank of England - were insufficiently prepared to deal with Northern Rock's difficulties.
To help prevent a similar banking crisis in the future, the report called for better communication between the three financial authorities.To help prevent a similar banking crisis in the future, the report called for better communication between the three financial authorities.
At the Bank of England, it wants to see the creation of a head of financial security, who will act as a key adviser to the chancellor.At the Bank of England, it wants to see the creation of a head of financial security, who will act as a key adviser to the chancellor.
REPORT CALLS FOR New head of financial stability at the Bank of EnglandIndustry fund to protect deposits at failing bankSpecial regime to take over running of any crisis-hit bankREPORT CALLS FOR New head of financial stability at the Bank of EnglandIndustry fund to protect deposits at failing bankSpecial regime to take over running of any crisis-hit bank
The report also calls for the establishment of a deposit protection fund, funded by the UK's commercial banks.The report also calls for the establishment of a deposit protection fund, funded by the UK's commercial banks.
It says that this fund could then be used in any emergency, "to obviate the need for the government to step in and rescue a bank".It says that this fund could then be used in any emergency, "to obviate the need for the government to step in and rescue a bank".
The report wants the establishment of a "special resolution regime for failing banks, to enable their continued smooth running of such a bank, while measures are taken to restore it to health, or ensure an orderly failure".The report wants the establishment of a "special resolution regime for failing banks, to enable their continued smooth running of such a bank, while measures are taken to restore it to health, or ensure an orderly failure".
"Banks should be allowed to fail to ensure market discipline, but only in an orderly manner," added Mr McFall."Banks should be allowed to fail to ensure market discipline, but only in an orderly manner," added Mr McFall.
The FSA said it would be publishing the conclusions of its own review in March.The FSA said it would be publishing the conclusions of its own review in March.
"We intend to study carefully the committee's report and will respond more fully in due course," it said."We intend to study carefully the committee's report and will respond more fully in due course," it said.
"The report will inform our input into the Tripartite Authorities' wider consideration of reform, which is currently under way.""The report will inform our input into the Tripartite Authorities' wider consideration of reform, which is currently under way."
Shadow chief secretary to the Treasury Philip Hammond said the MPs' report was a "crushing indictment" of both Northern Rock's management and the government.Shadow chief secretary to the Treasury Philip Hammond said the MPs' report was a "crushing indictment" of both Northern Rock's management and the government.
"It's probably one of the most damning reports that any select committee has put out in recent times," he added."It's probably one of the most damning reports that any select committee has put out in recent times," he added.
Liberal Democrat Treasury spokesman Vince Cable said Northern Rock's managers "behaved like a bunch of cowboys".Liberal Democrat Treasury spokesman Vince Cable said Northern Rock's managers "behaved like a bunch of cowboys".
"And the FSA did nothing to rein them in, or even appear to see there was a problem.""And the FSA did nothing to rein them in, or even appear to see there was a problem."
The government is continuing efforts to find a private buyer for Northern Rock.The government is continuing efforts to find a private buyer for Northern Rock.
It has proposed turning the £25bn of loans from the Bank of England into government bonds, which will then be sold on to investors.It has proposed turning the £25bn of loans from the Bank of England into government bonds, which will then be sold on to investors.
Have you been affected by the events at Northern Rock? What do you make of this new report? What future for the bank? Let us know by filling in the form below.Have you been affected by the events at Northern Rock? What do you make of this new report? What future for the bank? Let us know by filling in the form below.
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