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.

"It is clear from the thorough review carried out by the internal audit team that our supervision of Northern Rock in the period leading up to the market instability of late last summer was not carried out to a standard that is acceptable, although whether that would have affected the outcome in this case is impossible to judge," said Hector Sants, the agency's chief executive.

The agency did not immediately release the full text of its review, but said it would be available by the end of April.

Britain's taxpayers have so far advanced subsidies of 55 billion pounds ($110 billion) to prop up Northern Rock.

The company's new executive chairman, Ron Sandler, announced last week that he plans to reduce Northern Rock's staff of 6,500 employees by a third and to reduce its home mortgage book by half.

Sandler said he hopes to phase out government support within four years.

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