The House of Commons Treasury Committee will quiz the heads of the Financial Services Authority tomorrow as it gears up to question the Chancellor, Alistair Darling.
Sir Callum McCarthy, the FSA's chairman, and Hector Sants, the regulator's chief executive, will appear before the committee tomorrow morning in what promises to be a tough session.
Mr Darling is now due to face questions on Northern Rock when he appears before the committee in the next two weeks to discuss tomorrow's pre-Budget report.
After last month's fractious meeting with Mervyn King, the Governor of the Bank of England, and his officials, MPs on the committee are targeting the FSA as they try to apportion blame for the Northern Rock affair.
They believe the crisis exposed failings in the three-way split for banking regulation between the FSA, the Bank of England and the Treasury.
Michael Fallon, the senior Conservative on the committee, said: "It is pretty clear to us – and there is no mystery here – that the FSA was the supervisor. There is no use blaming Mervyn King when it is not his job to supervise the banks."
Mr Fallon said the committee would ask why the FSA did not pick up the problems at Northern Rock earlier, why the regulator gave Northern Rock a waiver on its balance sheet when the bank had already issued a profit warning, "and above all why its exposure to wholesale credit markets wasn't identified earlier as a key risk".
Northern Rock expanded at breakneck pace in recent years and accelerated its lending in the first half of 2007 as it tapped the booming debt markets to fund its business. Those markets froze over in August after defaults on sub-prime US mortgages caused investors to flee from assets they had once lapped up for high yields.
With many billions of pounds of short-term funding due for repayment, Northern Rock was forced to ask the Bank of England for emergency funding. It is thought to have borrowed over £10bn from the central bank at a penal rate of at least 7 per cent.
Mr Darling had to step in to guarantee Northern Rock's deposits after the Bank of England's promise of emergency funding sparked mass withdrawals that threatened the mortgage bank with collapse.
MPs have criticised the FSA for letting Northern Rock cut its risk-weighted assets under new capital rules, allowing the bank to announce a 30 per cent dividend increase on 25 July. The bank was forced to scrap the dividend last month.
MPs have so far focused on Sir Callum at the FSA, with Mr Fallon saying the watchdog's chairman was "arguido – an official suspect". But they will also ask tough questions of Mr Sants, the former investment banker who was head of the watchdog's wholesale markets division until he became chief executive in July. Sir Callum and Mr Sants will defend the regulator by setting out the chain of events as they saw them.
The committee was set to call Adam Applegarth and Matt Ridley, Northern Rock's chief executive and chairman, for questioning on 16 October, but the mortgage lender's bosses have won a delay because the pre-Budget report was brought forward to tomorrow. However, that means the Chancellor must appear before the committee soon to discuss the pre-Budget report and MPs will use the opportunity to question him about the Northern Rock affair.
Mr Darling has announced an increase in the amount of depositors' money guaranteed by the Treasury and has launched a review to come up with further proposals for improving the scheme. But there is little appetite for a major redrawing of responsibilities in the so-called tripartite arrangement between the FSA, the Bank and the Treasury, introduced by the Prime Minister when he was Chancellor.
Northern Rock is close to arranging up to £10bn of funding with Citigroup, the US giant it recently hired as an adviser. The funding means the bank could have the option of remaining independent rather than being sold to JC Flowers or Cerberus, the private equity firms that have been inspecting the former building society's books.Reuse content