Regulator Takes Blame for Northern Rock

Northern Rock was forced to turn to the government for support when its short-term lending resources dried up leading to a run on deposits. The government nationalized Northern Rock in February, and the company is now undergoing reorganization.

The Financial Services Authority said an internal audit had identified four major failings regarding Northern Rock: insufficient engagement with the company resulting in no rigorous follow up to problems arising from the credit crisis; a lack of adequate oversight of Northern Rock management; insufficient resources to supervise the company; and a failure to ensure that all available risk information was properly analyzed and applied.

"The review concluded that, overall, the supervision of Northern Rock was at the extreme end of the spectrum within the firms reviewed in respect of these failings and that its supervision did not reflect the general practice of supervision of high-impact firms at the FSA," the agency said.

A union official welcomed the agency's admission of failures, but noted that around 2,000 Northern Rock employees would pay for those failures by losing their jobs.

"We are calling on the FSA to ensure that their supervision practices are strengthened so there can be no repeat of the mistakes that occurred in Northern Rock," said Graham Goddard, deputy general secretary of the Unite union, who called for a full investigation of the events leading up to the bank's near-collapse.

"This inquiry must take a broad perspective of all those involved, including the previous management of the company. The hard working staff at Northern Rock deserve to know what went wrong and that lessons will be learnt," Goddard said.

To improve its performance in monitoring companies such as Northern Rock, the agency said it was creating a new group of specialists to regularly review supervision.

The numbers of supervisory staff monitoring high-impact companies will increase, and the FSA said it will expand its prudential risk department.

The agency said it will also pay greater attention to the liquidity of high-impact retail companies, and be more rigorous in assessing the competence of senior management.