Treasury Committee Publishes Report On Northern Rock

by Amanda Banks, Tax-News.com, London

28 January 2008

The Treasury Committee of the House of Commons has issued a report detailing developments in the Northern Rock crisis, entitled "The Run on the Rock".

The report, which gives an overview of the crisis and the handling of it stated that:

"The period from Friday 14 September 2007 to Monday 17 September saw the first run on the retail deposits of a United Kingdom bank since Victorian times."

The Treasury Committee analysed the causes and consequences of the run on Northern Rock, and the lessons to be learnt from it, in the report. It additionally emphasised the advantages of legislative change on a cross-party basis, and made proposals for such change, and for reforms of the Tripartite arrangements, on that basis.

Speaking with regard to Northern Rock and its regulators, the report continued:

"The directors of Northern Rock were the principal authors of the difficulties that the company has faced since August 2007. The directors pursued a reckless business model which was excessively reliant on wholesale funding. The Financial Services Authority systematically failed in its regulatory duty to ensure that Northern Rock would not pose a systemic risk."

It went on to state that: "The Chancellor of the Exchequer was right to view Northern Rock as posing a systemic risk to the financial system and to authorise the Bank of England's support facility. However, the Tripartite authorities did not prepare adequately for that support operation. Those authorities and Northern Rock ought to have strained every sinew to finalise the operation and announce it within hours rather than days of the decision to proceed with the operation."

"The Tripartite authorities at deputies level failed to plan in advance for the announcement of the Government guarantee on Northern Rock deposits that proved necessary to stop the run."

Going on to propose ways to deal with failing banks in the future, the Treasury Committee explained that:

"We recommend a series of measures for handling 'failing' banks in an orderly manner and in a way that insulates taxpayers and small depositors from the risk of banks failing. We recommend that a relevant authority be given power to acquire information relating to individual financial institutions and to take action in relation to an institution in specified circumstances."

"We also propose a special resolution regime for failing banks to enable smooth administration of such a bank to be combined with arrangements to ensure that insured deposits are safe and accessible."

It continued: "A deposit protection scheme must be simple and transparent. The "co-insurance" model of deposit protection—whereby small depositors stand to lose some of their money in the event of a bank closing—is discredited. Ensuring the speedy release of funds under any scheme is of critical importance, and we propose measures to provide for this. We recommend the establishment of a Deposit Protection Fund to be funded by participating institutions."

The Treasury Committee report went on to suggest that: "There was a significant failure of the Tripartite arrangements in September 2007, and lessons must be learned from that failure. The financial system in the United Kingdom would not be well-served by a dismantling of the Tripartite arrangements. However, the current arrangements lack a clear leadership structure or a strategy for effective communication with the public."

And concluded:

"A single authority ought to be given the new powers for handling failing banks, together with responsibility for the Deposit Protection Fund. 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."

"We propose the creation of a new post of Deputy Governor of the Bank of England and Head of Financial Stability. We set out how this new post and the accompanying Office will relate to the existing responsibilities of the Bank of England and to the other Tripartite authorities."

Responding to the report, the Financial Services Authority (FSA) stated that:

"As we have already acknowledged publicly, there were clearly supervisory failings in relation to Northern Rock and we are already addressing these. We will also examine carefully any further lessons that emerge from our internal review of the supervision of Northern Rock. We will be publishing the conclusions of that review in March."

"We intend to study carefully the Committee's report and will respond more fully in due course. The report will inform our input into the Tripartite Authorities' wider consideration of reform, which is currently underway."

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