FSA chief admits failings over Northern Rock crisis

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The Independent Online

The Financial Services Authority has admitted its regulation of Northern Rock was inadequate. Hector Sants, the chief executive of the FSA, acknowledged yesterday that the FSA's own internal review, to be published next month, shows that "supervision of the company did not meet the standards I would expect of the FSA".

Mr Sants said: "I have already acknowledged that it was not of sufficient intensity and rigour, particularly with regard to challenging the company's board and executive in respect of their risk management practices and their understanding of the risks posed by their business model." But he added: "I should also say that it is by no means necessarily the case that more active supervision on our part would have prevented what later occurred."

He also stressed Northern Rock was not alone: "There have been similar upheavals across banking... market-induced problems, however, are not an excuse for any inadequacy in our regulation of firms."

The Treasury Select Committee concluded last month that the authority had "systematically failed in its regulatory duty to ensure that Northern Rock would not pose a systemic risk".

In the future, Mr Sants said, "we are not intending to operate a no-fail regulatory regime. The freedom to innovate allows firms to take a risk which means that some may fail. In the case of Northern Rock, the Government guarantee has secured the position of depositors. I strongly believe that a moral hazard argument should apply to shareholders and management, but not to retail depositors."

Separately, the deputy governor of the Bank of England responsible for financial markets, Sir John Gieve, said credit markets are still "sticky", and concerns about bank losses from the US sub-prime mortgage crisis are increasing. Three-month Libor rose to 5.7 per cent yesterday, its highest since 8 January. Sir John said: " The current worries on the future of the monoline bond insurers are exacerbating the uncertainties about individual banks' exposures."