Lawmakers lay into UK authorities for Northern Rock fiasco

LONDON (Thomson Financial) - An influential group of MPs today laid into the three UK authorities in charge of financial stability for failing their duties during the Northern Rock crisis last summer and called for wide ranging reforms, including a new post at the Bank of England.
The cross party Treasury Select Committee said the Treasury, Bank of England and Financial Services Authority were all found wanting when the UK s 6th largest bank got into difficulties and that their shortcomings contributed to the first run on a UK bank since Victorian times.
"There was a significant failure of the Triparties arrangements in September 2007, and lessons must be learned from that failure," the MPs said.
The committee is now recommending a "radical shake-up" at both the BoE and FSA to better protect the UK s financial stability. It recommends a new office of Deputy Governor of the Bank of England and Head of Financial Stability is established to handle failing banks and take responsibility for a new deposit protection fund.
At present the BoE has two deputy governors, one specifically in charge of financial stability, currently held by John Gieve who also sits of the Board of the FSA.
It is not clear how any new office will affect the status quo but it is worth noting that Gieve came in for some severe criticism during his appearance before the committee and was accused of sleeping at the wheel while the Northern Rock fiasco unfolded.
The committee s chairman, John McFall told Thomson Financial News that how the new role is established should be down to a management review of the system currently in place and added that he does not know how it will eventually affect Gieve.
"There is a need for creative tension within the regulatory system and so these powers and responsibilities should not be granted to the Financial Services Authority," the committee said.
In the words of the Committee s chairman, John McFall: "This individual should be one of the principal channels of advice to the Chancellor of the Exchequer on financial stability."
This new position would also exercise new regulatory powers relating to banks, effectively circumventing the FSA.
Indeed, the FSA came in for some of the harshest criticism.
The MPs deemed that while Northern Rock s directors were the main reason behind its failure, the FSA "systematically failed in its regulatory duty to ensure that Northern Rock would not pose a systemic risk".
However once the Tripartite Authorities took control of the situation they failed to properly coordinate how the situation was handled.
"A key weakness of the Tripartie authorities was the failure, or absence of, a coherent communications strategy," they said.
The MPs said planning must be clear enough to show who will speak on behalf of the authorities if a similar situation re-emerges.
"A strong coordinating influence form one office will surely help this," said McFall.
The committee also said the authorities did not prepare properly for the public announcement that Northern Rock needed an emergency loan from the BoE, and should have made the announcement much earlier.
They also said there was insufficient planning for the announcement that the government would guarantee Northern Rock deposits, which was the key to eventually ending the run on the bank.
In order to prevent such an event occurring again, the MPs recommend a simple and transparent deposit protection scheme, to be funded by participating banks.
Additionally, the committee s chairman, McFall, himself a member of ruling Labour party, issued this warning to the government:
"If the government wants a fair wind for their reforms to the Tripartite arrangements in parliament, they must take seriously the cross-party recommendations in this report, which represent the will of parliament." "The report removes party politicking from an issue which affects every citizen each and every time they use the services of a bank," added McFall. rachel.armstrong; sivakumar.sithraputhran@thomson.com rar/ss/ajb COPYRIGHT Copyright Thomson Financial News Limited 2007. All rights reserved. The copying, republication or redistribution of Thomson Financial News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Financial News. MMMM