Rock: MPs v Darling
France has one, Switzerland too. The UK has a big'un, Germany numbers two or maybe more, and the US has a veritable epidemic of them.
As if you didn't know, I am talking about banks that have become chronically sick since last summer.
It's why the prevailing mood in Davos is anxiety - or at least among the business leaders and politicians from the wealthy, old economies of Europe and North America.
Among the roll-call of western banking shame, our own Northern Rock humiliation is special.
The damaged banks from the other countries were all terrible lenders, or foolish in the way they invested their capital. That includes Societe Generale, even if it was the victim of deception.
Northern Rock was a disastrously bad borrower, far too dependent on wholesale money markets for the finance needed to provide mortgages.
It was starved of vital sustenance last summer when those wholesale markets closed: its undoing was the crisis of confidence in the financial community precipitated by the disclosure of just how idiotic its international rivals had been as lenders.
Which is why the Rock had to demand succour from the Bank of England - and why it's now on a ÂŁ60bn lifeline provided by the Treasury.
But, make no mistake, for a bank it's as much a sin to take excessive risks as a borrower as it is to do so as a lender. A drying up of access to funding or liquidity will kill a bank just as surely as lending to those who can't repay.
So who's to blame for the Rock debacle? Well, we now have the first official evaluation, in the form of a report by MPs on the cross-party Treasury select committee.
Most at fault, say the MPs, were the Rock's directors for constructing a flawed business model; then the City watchdog, the Financial Services Authority, for failing to spot the flaw in the business model till it was too late; then the Bank of England, for being unimaginative and inflexible in the way it provided funds to the banking market after it seized up.
Few will quibble with that verdict. And it's certainly fashionable to give the FSA a good kicking. That said, it is worth noting that no British bank has been exposed as a lethally poor lender - for which, perhaps, the FSA deserves modest credit.
However it's the select committee's prescriptions for reform that will prove more controversial.
It seeks to address the widely acknowledged holes in the powers of the authorities to cope with a bank that runs into difficulties.
What seems to be required is:
a) the ability by the authorities to obtain more information at an earlier stage from any bank facing trouble;
b) greater powers to direct the offending bank to mend its ways;
c) a system for formally taking control of a bank on the brink of crisis, to quarantine the depositors and take them to safe harbour, while reconstructing or deconstructing the rotten part of the organisation;
d) deposit-protection arrangements that provide comfort to depositors that they can't lose money or access to their money.
The logical place for most of these new functions to go would be the Financial Services Authority - or at least that's what the chancellor thinks, and he'll flesh out his reform proposals in the coming week.
By contrast, the Select Committee is proposing the creation of a new semi-independent financial-stability body that would sit within the Bank of England. It would be run by a re-invented deputy governor of the Bank of England, who would have no direct reporting line to the governor on banking remedial work.
The committee has put the chancellor in a tricky position. He can't really ignore the verdict of a Labour-controlled committee. But presumably he can't simply abandon most of his own ideas.
The big issues here are whether the creation of this new bit of the Bank of England would lead to excessive duplication of costs and functions with the FSA - and whether it will enhance or undermine effective decision-making.
One committee recommendation would, I think, be impossible for the chancellor to adopt. That would be for the banks to "pre-fund" a new deposit-protection scheme or make substantial cash injections into it.
Although it is vital that we all have total confidence in the robustness of such a scheme, right now none of our banks have a surplus of spare cash.
It may be better to take an IOU from the banks than to drain them of liquidity at a moment when they're feeling the pinch - and the economy is paying a price in the form of reduced availability of credit.
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"Most at fault were the Rock's directors ....then the Financial Services Authority...then the Bank of England...Few will quibble with that verdict."
Come, come - not a few months ago that order of blame was reversed (except by many posters on your blog....)and the city were out for Mervyn King and the BoE - giving them the blame and excusing the calamitous Rock Board and the lax FSA. 'Truth is the daughter of time' and I'm delighted to see that the city have failed in their attempts at foisting the blame onto the BoE. Perhaps that is one of the reasons the Select Ctte think new powers should be invested there - rather than in the FSA?
In terms of who's fault it was then obviously everybody's except the Governments. If the Chancellor allows a housing credit bubble to develop - and the Rock situation to emerge (which everybody knew about) then shame on him - and it should be said.
I would support a scheme to 'fix' the FSA, rather then create yet another body to manage things. The Banks also have to take responsibility for the problems and fund such a scheme - and also have clear legal requirements to the FSA to report any emerging situations.
The situation where everybody in the City knows about something and nobody says anything must be wrong.
To be effective this should be a Global initiative and I would expect the UK to take a lead here to invite world-wide banks to participate in such a scheme.
If the Banks are going to lose money in the case of any problems then they may have the incentives to inform the FSA of their concerns.
I agree that stress testing requires asking what is the worst that can happen, WHAT IS THE RISK OF IT HAPPENING and what shall we do about this risk? Those who criticise the FSA and Rocky should ask what is the answer to the risk question at the relevant time and what would be appropriate action if borrowing from the 'lender of last resort' is not on because it seems to lead to a run on the bank.
I also agree that there should be a FUNDED (by the banks) compensation fund as in the USA. IOUs are useless if they cannot be met.(stress testing again)
Only such a fund can stem a runs on banks.
Dear Robert ,
For once , your scathing remarks about Northern Rock have been outdone by John McFall. You have not been hard enough in your criticisms !
He certainly pulls no punches does he?
Regards , Norman Cook
The focus of the FSA is regulating the financial sector from the viewpoint of a retail customer.
The gap in the regulatory framework revealed by the Northern Rock problem is regards the wholesale financial markets. As for that matter, was Barings Bank, Soc. Gen., etc. This respnsibility would seem to lie better with the Central Banks and a regulatory authority focused on retail customers.
Banks have been allowed too much 'rope' for too long. They are now hanging us all with it. Light touch regulation is to blame and regulators who do not bite hard or quick enough are part of the problem. The solution is better and stronger regulation. This last six months has proved that our existing systems are not good enough. It will probably swing the other direction now, but banks only have themselves to blame for that. Unfortunately, banking consumers of all types will inevitably pay for both the bank mistakes and the correction which will follow. Eddy Weatherill, chief executive of the Independent Banking Advisory Service (IBAS)
Robert, how are you going to recover the depositors' money in practice? The money has already been lent out by the time the troubles are known.
There is no solution to credit squeeze other than lowering interest rates, encouraging people with money to lend to whoever willing to pay a large premium.
In the meantime I would hope that someone other than Private Eye is looking very carefully at the accounts of the companies that wish to take over Northern Rock to assess their suitability to join the "mile high club" with the taxpayers money.
It would be better for everyone if a major bank with real assets (are there any left?) stepped in, rather than the present crop of names.
so the select committee reckons what we need is another "suit" in so called regulatory bodies.
When will this country learn that its the suits that cause the problem. They expect huge salaries for doing nothing but go to meetings and lunches.
Does the fsa even speak to the head of risk management of our large lenders ?
Does he ask the basic question what are the big risk areas to your business ? Or what do you not see as a risk ?
And then the idiot from the tories who seem to think its a government issue when basically business people are lying criminals.
This country makes you sick. It's all about getting onto a gravy train and letting someone else take responsibility.
Apparently Mother B was in a foul mood this afternoon. It seems only a matter of time before the ±«Óătv lets the cat completely out of the bag and opens the eyes of the great unwashed to the fact that Mother B's baby of 97, the FSA, has fallen at the first hurdle. Anyway that is the verdict of the Parliamentary Committee which has looked into the circumstances leading up to the Northern Shipwreck. According to Tubby Isaacs and we know what a gossip he is, Ally D has been told in no uncertain terms that he had better come up with a credible solution and fast. One which the great unwashed will believe and reflect well on the prudence of Mother B in running a stable economy for hard working families. It seems that Camp Cameron is preparing a preemptive strike. The boy David will tackle the issue at the next PM's Question Time going for the jugular by committing the Tories to abolishing the FSA and handing bank supervision to his snooty pals at Threadneedle Street as soon as they come back to power. Unfortunately the first focus groups are reporting that the public think that this would be a very sound idea. For Mother B its deja vue all over again aka raising inheritance tax thresholds which sent her skidding on the rocks at the party knees up. Even the election had to be canceled. So cometh the hour come the man and Ally D looks a strong candidate to be the the next Governor of the Falklands. No wonder he declined his jellied eels at lunchtime.
oddly forgotten to mention this in their reports:
The leak and its effects
147. Before the provision of emergency liquidity assistance by the Bank of England to Northern Rock could be announced formally, the outlines of the operation were reported by the ±«Óătv—at 8.30 pm on ±«Óătv News 24 and then on other ±«Óătv media outlets.356 Several witnesses argued that the premature disclosure of the support operation in this way was instrumental in the run that followed. Mr Applegarth said that the leak “caused immense difficulties”.357 He thought that “it was the announcement of the facility being leaked that actually was the start of the run”.358
You state,
"it is worth noting that no British bank has been exposed as a lethally poor lender "
NOT YET, but our house price bubble has only begun to fizzle, and could well burst. Then considerable dodgy lending may well emerge.
Salaam/Shalom/Shanthi/Dorood/Peace
Namaste -ed
Enjoying the triple freedom of Senior Citizenship:
Kids grown Mortgage paid, Ancestors buried.
"Most at fault were the Rock's directors ....then the Financial Services Authority...then the Bank of England...Few will quibble with that verdict."
Come, come - not a few months ago that order of blame was reversed (except by many posters on your blog....)and the city were out for Mervyn King and the BoE - giving them the blame and excusing the calamitous Rock Board and the lax FSA. 'Truth is the daughter of time' and I'm delighted to see that the city have failed in their attempts at foisting the blame onto the BoE. Perhaps that is one of the reasons the Select Ctte think new powers should be invested there - rather than in the FSA?
Brown's baby the FSA is a failure.
National economists say Brown and Darling's work on Northern Wreck is worse than the South Sea Bubble. Brown and labour have 'Reverse Midas touch'. They are the kiss of death.
They are just words and dither. They take money and data from working families. Throw both into areas they hope will vote for them. Money and data is wasted or lost.
No labour project has worked, costs have been countless times overbudget, government departments are unfit.
Labour pass laws and do not manage the results. Labour take taxes and do not manage. They can not even mamge their own labour donations! What chance has taxpayers money of being managed?
I have no doubt the FSA is at fault here. It has reduced the significant banking supervisory experience it was bequethed from the Bank of England to a handful of souls and took the view from day one(driven perhaps by the politics of the senior management of the constituent organisations)that banks were not special. A major strategic mistake. An inquiry into the supervisory failure of the Rock along the lines of the Bingham inquiry into BCCI would be well merited. This would also be a convenient way for the Government to avoid having to implement the damning conclusions of the TSC...
This is Alistair Darling in the House of Commons in 1997 in the debates on the Bank of England Bill: "On banking supervision...we have made a number of suggestions over the years to improve the situation following the collapse of BCCI and then Barings...we have taken further steps to ensure that one of the problems that emerged with both BCCI and Barings-- that each regulator did not know what the other was doing -- will be dealt with....
the collapse of both Barings and BCCI showed that it is necessary to have a domestic regulator that has sufficient clout and reputation to deal with its international counterparts. That will now be possible with the new FSA."
Many in the Labour establishment laid the blame for BCCI at the Bank of England's door. The shiny, new FSA was going to be the answer to the problem. Perhaps the public could be given an explanation by Darling and Brown of why the comments now being made about the FSA seem to echo so clearly what they were saying about the Bank of England in 1997 and why the solution to the present problems is thought to involve giving powers back to the Bank?
lets get this straight, the decision to bail out nrock (sounds a bit like enron)was purely to save face,to show the people we know what we are doing ,but the truth is brown and darling know as much about economics as forest gump(sorry forest).the prudent chacellor says we have a strong economy even with all the financial turmoil,I dont believe it,people have had their disposable income reduced for the last 10 years by high taxes and high inflation which is not 2.1% ,more like 7.5% this year ,goverment policy has led us into a 2 year recession its a shambles.
Creating a British 'Federal Reserve Board' within the Bank of England so they can police themselves is insane. From the US you can see just exactly how well that worked.
You need to beef up the FSA's power over banks, not deminish it. I know that's exactly the opposite of what the banks want, but it's exactly what the UK and the Bank's depositors need.
Hmm... the regulatory model that broke the first time it was needed is fundamentally sound but failed due to "exceptional conditions"? Pardon my ignorance, but isn't the whole point of these models that they DON'T break under unusual conditions? The sub-prime crisis was easily forseeable, myself and a few associates predicted it coming as far back as 2005.
At long last Gordon Brown's economic "miracle" is being seen for what it is, smoke, mirrors and a huge dose of debt. All during a time of supposedly unprecedented economic growth. Heaven help us when the next recession strikes.
"The damaged banks from the other countries were all terrible lenders, or foolish in the way they invested their capital. That includes Societe Generale, even if it was the victim of deception.
Northern Rock was a disastrously bad borrower, far too dependent on wholesale money markets for the finance needed to provide mortgages."
You keep making this contrast, as though continuous repetition will somehow make it true.
The rationale behind much US mortgage lending has been found out by falling property prices. Anyone with half a brain has been saying for years that the lending rationale is nonsensical, and that it is only sustainable while property values don't fall.
There is a huge amount of UK property-based lending that is similarly dependent on the maintenance of an artificially high level of property prices. When these start to fall, we will have a string of lenders in difficulties, just like the US.
The fault lies with those who were/are in a position to influence the path of events, but who either failed to anticipate the inevitable, or who chose to ignore it. That the structure is failing is NOT the fault of a few rogue subordinates.
The FSA should be shut down; not as it has failed in its duty of care to investors and share holders, but because it simply cannot blow the whistle on banks that sail too close to the wind.
If it were to do the job it is paid to do, it would cause panic amongst those it is trying to serve.
The very act of flagging up 'incompetence' will trigger the callapse they seek to avoid.
I suspect many banks know this, and therefore have little fear of the FSA.
The last thing we need is yet another financial services watchdog.
Surely supervision of the financial services sector should be centralised into a single body (ie, the FSA) rather than split monitoring between the FSA, Bank of England, and Treasury, and consumer protections between the FSA, BIBA, and Trading Standards?
We have a Financial Services Authority - so why not treat it as one and stop diminishing its authority and efficiency by creating yet another body where communication failures can begin?
2c.
Am I being naive or am I trying to be persuaded that the same so called economic gurus that led the world into the economic mess its in will come up with the answers to get us out of the same mess they created.
Yes, of course the Directors are to blame, notably the Non-Executive who chaired the Risk Committee. It transpires that he was also ousted from his former job, as CEO at another High Street Bank. In other words he has been ousted from the only jobs he has held, yet, he is still referred to as Gordon's favourtite Banker. I will leave the reader to fill in the blanks !!
I hope that those who often post here claiming that Mr Peston is to blame for NR's downfall will note that the Select Com. aportions not one ounce of blame at Mr Peston's door.
How very very dare they!
Robert says "... right now none of our banks have a surplus of spare cash."
It does not get much plainer than that.
I'd suggest drawing your own conclusions and 'acting rationally'.
The select committee report fails to address what I would consider an obvious question; namely, was Northern Rock's backup line of credit smaller than other UK banks (the report compares it with Countrywide in the US only). If anything was reckless about Northern Rock's business model, it was this. I do not think that Northern Rock's dependence on wholesale funding was reckless. On the contrary, such funding would be typically locked in for a fixed term, unlike deposits, most of which could be withdrawn on demand – note that it was the retail run on Northern Rock that precipitated the crisis. While the report does say that reform of liquidity regulation cannot wait for international agreement, it does not recommend any action to reduce the likelihood of another run on a bank in the near future. It seems to me that all that is required is a story, such as a rogue trader, that shakes some bank's depositors' confidence in the security of their deposits.
Robert,
Depositors only needed reassurance
because folks like you scared them into thinking their money was in danger when it never was. Do you really think little old ladies would have queued in the cold just because NR was getting their wholesale funding from a different source (i.e. the BoE) than before? Of course not, they queued because the ±«Óătv kept banging on about lack of depositor protection when that was never an issue. If it happened again and full depositor protection was in place, no doubt you would then run scare stories about the length of time it would take for them to get their money out or some other nonsense that would grab some headlines.
Robert (28),
"Depositors only needed reassurance "
And it was rather slow in coming, wasn't it?
With regard to Northern Rock it appears that a lot of people are being wise after the event. Here is a quote from the Questor Column of the Daily Telegraph dated 26 January 2006.
"Northern Rock has an impressive team and a strong business model. We said buy in November, and think the shares should still do well. If the shares show any signs of weakness, buy some more. Otherwise hold."
In the Sunday Telegraph dated 27 January 2008 there was a list of the best fixed-rate bonds. Guess who headed the list with 6.90%?
Northern Rock.
With regard to Northern Rock it appears that a lot of people are being wise after the event. Here is a quote from the Questor Column of the Daily Telegraph dated 26 January 2006.
"Northern Rock has an impressive team and a strong business model. We said buy in November, and think the shares should still do well. If the shares show any signs of weakness, buy some more. Otherwise hold."
In the Sunday Telegraph dated 27 January 2008 there was a list of the best fixed-rate bonds. Guess who headed the list with 6.90%?
Northern Rock.
#28 Dorte
I think you will find that the current system for depositor protection is woefully inadequate.
Just ask any of the poor souls who have struggled to get their deposits back from previous bank closures e.g. BCCI.
Elderly people in particular, cannot wait years to get their money back in dribs and drabs from the FSCS.
That is why Darling and crew are frantically trying to put better protection in place for depositors before the next run on a UK bank ... which may be sooner than you'd imagine.
Why should the government support Public Finance Initiatives for large capital spending on national projects, yet favour national spending on a capital crisis in the private sector? Why not use PFI for Northern Rock and public funds for health, education and defence?
Will Neelie Kroes be in on the secret funding?
State funding is anti competitive and flies in the face of the raison d'etre of the EU.
At long last the lawyers will get their turn at the trough..
502!