‘It is somewhat ironical,’ the chairman of the Financial Services Authority told the Treasury select committee investigating the Northern Rock crisis, ‘that one of the responses is to try to seek from the rating agencies even more work and even more assessment.’ The paradox intriguing Sir Callum McCarthy was the suggestion that credit-rating agencies, having failed to predict Rock’s troubles, should now also produce liquidity reports on banks.
MPs on the select committee — about to produce a report that will be highly critical of the financial regulator — may themselves think it ironical that, having equally failed to foresee Rock’s fate, the FSA is being rewarded with an expanded role. Chancellor Alistair Darling proposes allowing it to gather more information on banks and to take management control of those that fall into difficulties, bypassing current insolvency procedures.
Increasing the FSA’s workload is perhaps Darling’s subtle punishment for allowing the biggest banking crisis for a generation, but the result is to reprieve an agency that has proved itself unfit for purpose. The blame for Northern Rock’s problems starts with the bank’s own board, but the regulator is there to curb overenthusiasm and it failed — both in the prevention and the cure.
Before the Rock’s money ran out, the FSA was looking in the wrong direction. It was focused on protecting the public against abuses on retail products such as misselling — when last year’s problems were in the wholesale markets. When it did look at banks, it examined the asset side of the balance sheet although the real dangers were on the liability side — the inability to raise money, not the risks of lending it. And it concentrated on capital rather than counting the cash: just a month before the credit crunch, the FSA approved a capital-adequacy ratio for Northern Rock that allowed it to raise its dividend by 30 per cent — even though there was no money in the coffers to pay it.
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