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Northern Rock - Treasury Select Committee report “The run on the Rock”

Headlines and commentary abound, but the real thing (181 pages) is here (pdf) or  here (html).

It stretches from mention of previous bank runs (Overend, Gurney & Co., 1866;  City of Glasgow Bank, 1878), Barings' liquidity crisis and the liquidation of BCCI to a detailed analysis of the development of the Northern Rock crisis in August and September 2007.

The conclusions (quick link here) highlight firmly the responsibility of Northern Rock's directors for the reckless business model - borrowing short and lending long - which collapsed with the credit crunch, for failing to ensure that the bank remained liquid as well as solvent, and for failing to provide against the risks they were taking.

But they are also highly critical of the FSA:
  • "substantial failure of regulation."
  • "it was wrong of the FSA to allow Northern Rock to weaken its balance sheet at a time when the FSA was itself concerned about problems of liquidity that could affect the financial sector."
  • "The current regulatory regime for the liquidity of United Kingdom banks is flawed."
  • "It was the responsibility of the Financial Services Authority to ensure that the work of the Board of Northern Rock was sufficient to the task. The Financial Services Authority failed in its duty to do this."
  • "The Financial Services Authority should not have allowed nor ever again allow the two appointments of a Chairman and a Chief Executive to a "high-impact" financial institution where both candidates lack relevant financial qualifications"
  • "The FSA did not supervise Northern Rock properly. It did not allocate sufficient resources or time to monitoring a bank whose business model was so clearly an outlier; its procedures were inadequate to supervise a bank whose business grew so rapidly. We are concerned about the lack of resources within the Financial Services Authority solely charged to the direct supervision of Northern Rock. The failure of Northern Rock, while a failure of its own Board, was also a failure of its regulator."
  • "In the case of Northern Rock, the FSA appears to have systematically failed in its duty as a regulator to ensure Northern Rock would not pose such a systemic risk, and this failure contributed significantly to the difficulties, and risks to the public purse, that have followed."
The Bank of England gets off relatively lightly with recommendations as to its response but few direct criticisms:
  • "We are unconvinced that the Bank of England's focus on moral hazard was appropriate for the circumstances in August. In our view, the lack of confidence in the money markets was a practical problem and the Bank of England should have adopted a more proactive response."
  • "we have concluded that the Bank of England should have broadened the range of acceptable collateral at an earlier stage in the turmoil."
The report's conclusions about the Chancellor's role are somewhat more opaque:
  •  "State support for Northern Rock has involved the Government entering into contingent liabilities on a very large scale. It is important that the Treasury discharges its obligations to the House of Commons—and through the House of Commons to the taxpayer—promptly and fully to report on the extent of such liabilities."
  • "We cannot accept, as some witnesses have suggested, that the Tripartite system operated "well" in this crisis. In terms of information exchange between the Tripartite authorities, the system might have ensured that all the Tripartite authorities were fully informed. However, for a run on a bank to have occurred in the United Kingdom is unacceptable, and represents a significant failure of the Tripartite system. If the system worked so "well", the Tripartite authorities should take a closer look at the people side of the operation."
  • "While we welcome the Chancellor's admission that he was ultimately in charge of the decision making process relating to Northern Rock, we are concerned that, to outside observers, the Tripartite authorities did not seem to have a clear leadership structure."
  • It is unacceptable, that the terms of the guarantee to depositors had not been agreed in advance in order to allow a timely announcement in the event of an adverse reaction to the Bank of England support facility."
  • "We are also concerned that it did not prove possible to announce the guarantee that was decided upon that day before the markets opened the following day. The cumulative effect of these failures was to delay the guarantee until the evening of the fourth day after the run started and thus to make the run on the deposits of Northern Rock more prolonged, and more damaging to the health of the company, than might otherwise have been the case."
  • "In view of the role that fears of a leak of a support operation had played in the decision on Tuesday 11 September that a covert operation was not possible, the Tripartite authorities were unwise initially to accede to Northern Rock's request for the announcement of the support operation to be delayed until Monday 17 September. In the light of subsequent events, it seems evident that the Tripartite authorities and Northern Rock ought to have strained every sinew to finalise the support operation and announce it within hours rather than days of the decision to proceed with the operation."
  • "In failing either to make an announcement earlier in the week or to put in place adequate plans for handling press and public interest in the support operation, the Tripartite authorities and the Board of Northern Rock ended up with the worst of both worlds."
It will be interesting to see whether the Committee's recommendations for regulatory reform are followed, given the Chancellor's slightly different proposals aired last week.

 

 

Date: 26th January, 2008
Author: Chris Laughton

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