Thursday, 27 March 2008

Everyone makes mistakes

The FSA are coming in with their hands up.

The Northern Rock crash was their fault, and in a moment of honesty that is rare in government, the FSA have told the rest of the world where they went wrong.

The failings were grievous:

  • For 12 months Northern Rock was monitored by insurance supervisors who had little expertise in banking.

  • During the 2 years before the crash, three department heads had responsibility for NRK. Only one other bank had a similar experience of such a high turnover of supervisory staff.

  • The FSA kept no records of supervisors' meetings with its risk assessment panel that discussed the high risk activities of Northern Rock.

  • NRK supervisors did not provide the risk assessment panel with any "developed financial analysis" on the bank.

  • Somewhat bizarrely, the risk panel agreed to allow the supervisors to lengthen the period between the bank's assessments from 24 months to 36 months.

  • Northern Rock's supervisors did not understand what close and continuous supervision entailed and kept only one partial record from eight meetings with the bank.

  • The supervisors failed to enter any details into the FSA's database on the risks presented by the bank, or how those risks were worsening.

  • The FSA did not issue the bank with a risk-mitigation programme that should have forced it to address its risks. In fact, Northern Rock was the only bank monitored by the FSA without such a plan.

    In summary, the FSA's supervision of Northern Rock was totally incompetent. NRK could do what it wanted, and take on any risk it liked without any serious intervention from the FSA.

    With such a lamentable record, it is tempting to demand some heads. Perhaps a couple of resignations would mitigate the sense of outrage that follows such a systematic and comprehensive failure. However, the temptation should be resisted.

    A couple of high profile resignations might obscure and delay what really needs to be done. The FSA should be abolished and full supervisory responsibility returned to the Bank of England.

    Josh said...

    It would still be nice to see a couple of people fired.


    AMIGAUSER said...

    I have to disagree,when a government department confesses to a mistake, you have to wonder if they are just protecting the relevant ministers (G.Brown, Ed Balls for instance) from being blamed for the coming Housing disaster.

    If you were to sack any of these civil servants, they would just be found comfy jobs in the financial sector, - our very own version of crony capitalism.

    ghostwriter said...

    Quite a story, eh. But hardly surprising. And now the rules and regs will be amplified and expanded until they strangle growth--and then they will be relaxed and it will all start again. That's government for you: if it changed anything they'd abolish it.

    Off topic, but in the FT:

    House price growth falls to 12-year low

    ...“Confidence is a very important factor in the housing market and much of this confidence is determined by expectations of the future path of house prices,” said Fionnuala Earley, Nationwide’s chief economist.

    That's a classic statement, confirming all our worst fears about the housing bubble: it's nothing but a pyramid scheme in which the next sucker pays more than the last, and so it has gone on. Until there are no more suckers. That point has, I think, almost been reached.

    ghostwriter said...

    Sorry, I just had to share this re: T5 chaos (from Bloomberg)

    The rest of Heathrow is operating normally said a BAA spokeswoman who declined to be identified.

    Ha ha. Nobody wants to take the blame for anything, anymore, from the Prime Minister on down. What a country.

    Anonymous said...


    I was with you until the last paragraph. So are we saying that the responsibility for regulation should go back to the primary UK institution responsible for the mess, who is showing how quick it is to use taxpayers money to bail out it's friends.

    The problem isn't the structure of the FSA. It's that they were incompetent. Giving the job to the BoE is a conflict of interest. If anyone needs to be abolished it's the BoE. A currency board would do just fine in their place.

    I think we are entering the phase of "shock doctrine" per Naomi Klein's book. In the midst of the chaos and calls for something to be done the banksters are hoping to ram through major favourable restructuring.