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Media Stories: 09/10/2007 - TreasCom 09 October 2007

TreasCom 09 October 2007

MPs demand answers from FSA over anti-BofE media briefing

Money Marketing, Paul Mcmillan - 09-Oct-2007

The FSA has come under heavy fire from the Treasury select committee for failing to answer questions about the Northern Rock debacle and accusations the regulator briefed the media against the Bank of England.

TSC chairman John McFall attacked FSA chairman Callum McCarthy at this morning’s meeting for not answering a number of questions about the tripartite system of governance and the roles of the respective bodies.

McFall said: “This is getting really, really unsatisfactory. It seems you are crawling into your den and not answering anything, we want to sort out this issue, we need to know what one of the eminent authorities thinks.”

McFall also confronted McCarthy with the accusation FSA “spinners” briefed against the Bank of England in an article that appeared in the Financial Times the day governor Mervyn King gave evidence to the TSC.

McFall said he has been told by journalists that the FSA “spinners were out” but McCarthy said he did “not recognise this statement”.

McCarthy pledged to fire any FSA staff that were found to have been briefing against the bank.

McFall requested that McCarthy and chief executive Hector Sants consults with the FSA press office over the story, talking to all staff who briefed journalists in September.

McCarthy refused to answer whether he thought the Bank of England should have pumped increased liquidity into the markets to avert the crisis. However Sants told MPs that looking “narrowly” at the Northern Rock issue, if liquidity in smaller amounts had been made available the lender of last resort facility may not have had to be applied.

Labour MP Sion Simon accused McCarthy of being the Sugar Ray Leonard of financial services as he proved to be a “world class ducker and diver” during the meeting.

McFall said: “The tripartite system worked in your opinion and everyone played their part, so the question I have in the light of the first bank run in 140 years is if that is success what is failure? You are telling me the tripartite system works when you had the biggest cock-up for 140 years.”

UK's FSA defends record on Northern Rock

REUTERS, Clara Ferreira-Marques and Matt Falloon

LONDON, Oct 9 (Reuters) - Britain's financial watchdog, under fire over the near-collapse of Northern Rock defended its role, but said it could have moved earlier to check the lender was testing its resilience to a liquidity crunch.

The Financial Services Authority, responsible for policing UK banks, is facing the biggest crisis since it was set up seven years ago, accused along with other regulators of failing to do enough to prevent the first run on a UK bank in over a century.

"I do not think we have failed in our supervisory duty. I think we have discharged our duties," FSA Chairman Callum McCarthy told parliamentarians investigating the crisis, during a gruelling hearing that lasted well over two hours.

He confirmed the FSA -- which regulates the banking system along with the Bank of England and Britain's finance ministry -- was looking at reforms following Northern Rock's troubles, in areas including guarantees on UK savings, already under review, and insolvency laws which currently freeze deposits.

"We believe that there are lessons to be learnt, which we are identifying and will apply, in respect to the supervision of Northern Rock, but... we cannot run and do not run a zero failure regime," McCarthy told the Treasury Committee.

The FSA dismissed accusations it should have expected problems at Northern Rock after the bank saw a jump in its share of the mortgage market in the first half -- growth some now say should have hinted at the fragility of its business model -- but said it could have done more to press the bank on its resilience.

“The intensity of that dialogue -- at the time of (a February 2006) visit and subsequently -- should have been more forceful. Those points were being identified by July, when we were engaging in discussions on their stress-tests, but obviously at that point in time, events overtook the firm," Chief Executive Hector Sants told the hearing.

"Let's remind ourselves, it is the board's responsibility to run the company prudently. But ... we should have been in more intensive discussions with the company earlier."


The FSA told the committee Northern Rock's assets were not troubled, and said the bank was not pushed to the brink by the failure to raise funds on wholesale markets -- a widespread perception -- but by the shortening of terms that pushed it to seek a safety net from the Bank of England.

"It did not actually fail to fund itself -- maturities shortened back into the overnight period, to the point the board thought it prudent to seek the lender of last resort facility," Sants said. "They needed the insurance of opening up a facility with the Bank of England. They would not have had to use that facility had there not been the retail run."

He added that the bank was not unusual in its use of short-term funding, with a far greater risk lying in its reliance on wholesale markets, primarily securitisation.

Critics of Britain's tripartite regulation of the banking sector say its flaws became apparent as Northern Rock's troubles prompted furious buck-passing over who should take responsibility.

But the FSA's chairman refused to be drawn into the debate on Tuesday, denying relations between itself and the Bank of England turned "poisonous" after reports -- quoting unnamed officials -- blamed the Bank of England for the crisis.

"If I knew of anyone within the FSA (briefing on) this I would fire them," he said, denying FSA involvement.

FSA Should Have Focused On Northern Rock Tests

By Adam Bradbery, Dow Jones 9th October, 2007

LONDON -(Dow Jones)- The U.K. Financial Services Authority should have focused more closely on U.K. lender Northern Rock's (NRK.LN) stress-testing of its risk exposure, according to Hector Sants, Financial Services Authority chief executive.

Sants said Northern Rock's stress tests didn't adequately account for the possibility of a market downturn or liquidity crisis, like that which took place this summer.

"I do think we should have been concerned around the stress-testing issues...I am more than happy to indicate that I think there are some significant lessons to be learnt," said Sants in a testimony before the U.K. parliament's Treasury Committee.

Sants said the FSA should have had more intensive dialogue with Northern Rock about issues such as stress testing at an earlier stage than it did.

"I agree we should have been in more intensive dialogue with the company earlier," Sants said.

Sants and FSA Chairman Callum McCarthy said the covert regulatory support to rescue Northern Rock had attractive aspects to it, but a leak of support to the bank removed that option.

Covert support had "attractive features," McCarthy said, but this option was no longer possible once the Bank of England's support for Northern Rock was made public.

"The thing that happened with Northern Rock was the leaking of the information" and the appearance of that information in the media, McCarthy said in testimony to the U.K. parliament's Treasury Committee. "It was already in the public domain."

The FSA chairman said the legal obstacles to a Northern Rock takeover, on the other hand, weren't significant.

"I don't believe that the legal problems were particularly significant" with regard to the possibility of a takeover of Northern Rock, McCarthy said.

Sants said it was clear to the regulator that not all support operations could be covert.

McCarthy admitted the problems at Northern Rock had been damaging for the U.K. He said he had previously described the "events at Northern Rock as being damaging."

He also said he placed slightly less stress than BOE Governor Mervyn King on the issue of moral hazard, which raises concerns about bailing out the financial sector.

McCarthy said practical questions had made a covert rescue difficult.

McCarthy said in his testimony that the Northern Rock board took the decision that it would need to announce any restructuring to the market and that there was no way to prevent this.

"The board took the view there would need to be an announcement," McCarthy said.

Sants said Northern Rock was able to get funding before the run on assets by depositors and this was "a major driver" of the lender's problems. He said that the company was not using the BOE's special credit facility until the run on deposits.

Money market conditions were "highly unusual" said Sants.

McCarthy said the FSA didn't assess the risk of the money markets closing up the way they did during the recent liquidity crisis, which he described as an " exceptional and, indeed, an unprecedented set of events."

"I absolutely accept, as Hector has said, that we didn't identify the probability of that happening," said McCarthy.

Hector Sants said Northern Rock didn't include the closure of the securitization and securities repurchase, or repo, markets as a factor when undertaking stress tests of their balance sheets and risk exposures.

Sants admitted that the U.K.'s liquidity regime, held in the sterling stock regime, could be improved. This system makes sure that banks have enough assets to balance liabilities.

"We agree that the liquidity regime could be modernized," said Sants.

McCarthy said Northern Rock no longer has any exposure to the subprime mortgage market because it has passed that on to other counterparties.

"The subprime business that they do, which is very limited in scale, has been passed on to others," said McCarthy.

The FSA chairman also said Northern Rock has a good quality loan book and its three-month arrears figures are less than the industry average.

"If I look at the assets of Northern Rock...the three-month arrears figure has increased slightly over the last year, but is still running at less than half the industry average," said McCarthy.

Sants said the British subprime market will probably shrink slightly as a result of the liquidity crisis.

"We don't have any particular signs of the (U.K.) subprime market growing, and indeed probably as a result of recent market events it will contract a bit," said Sants.

Sants said there was a need during the Northern Rock crisis for depositors to have some security about their savings.

"We might not have had queues if consumers had been confident that their deposits were safe," said Sants.

FSA: we failed to predict Rock crisis

Graeme Wearden, The Guardian, October 9, 2007

The chief executive of the Financial Services Authority has admitted that its supervisory practices failed to predict the Northern Rock debacle and need to be improved.

Appearing before the Treasury select committee this morning, Hector Sants revealed that the "stress-tests" conducted by the FSA on Northern Rock had not included the possibility of a general crisis in the credit markets.

"We did not perform to my satisfaction with the stress-testing scenarios," said Mr Sants. "There are lessons to be learned."

The FSA faced heavy criticism from the committee over the FSA's role in supervising the troubled bank.

Mr Sants said that the FSA had performed its last full assessment of Northern Rock in 2006, and was not due to conduct another until 2009. He explained that while the bank had been identified as a "high-impact organisation", the regulator had concluded there was only a low risk of it getting into difficulty.

"There's no doubt that this assessment was incorrect. There are serious lessons to learn about probability," said Mr Sants. He has worked for the FSA since 2004, and became chief executive in July.

John McFall, chairman of the committee, asked Mr Sants and FSA chairman Sir Callum McCarthy why the FSA had not spotted the problems at Northern Rock before the crisis spun out of control.

Mr McFall argued that the FSA should have had a better grip on Northern Rock, which grew its market share rapidly by offering competitive deals and using the wholesale credit markets to underpin its lending.

Sir Callum argued that it was "almost impossible" to anticipate in advance the credit crunch which forced Northen Rock to seek emergency funding from the Bank of England last month.