The FSA says it has serious lessons to learn in the aftermath of the Northern rock fiasco particularly around stress testing of extreme situations and probability analysis.
Speaking at the Treasury select committee meeting today, FSA chief executive Hector Sants said the episode showed the regulator needed to look again at its supervisory processes.
He said probability of getting into difficulty analysis on Northern Rock had been incorrect and that more extreme stress testing was needed.
He also suggested that in the case of Northern Rock the three year period between each full regulatory analysis was too long.
Sants also accepted the FSA needed to do more to communicate with the general public issues around bank solvency to ensure confidence.
FSA chairman Callum McCarthy said compensation arrangements needed to be updated to offer better compensation and access to funds straight away in the event of a collapse.
McCarthy told MPs the main difference between the Bank of England and FSA is the FSA believes the problems over keeping the lender of last resort facility covert were more practical than legal.
He said in was unlikely that the issue could have been kept covert although there were legal issues with the Markets Abuse Directive in certain situations.
Sants also said work needed to be done to bring more transparency to the role of credit agencies.
Sants said: “We agree there is work to be done as to what use the institutional investors make of credit agencies, how do they engage with them and if is there proper transparency there.”
He told MPs: “There are lessons to be learnt here with regard to our supervisory practices. We do need to look back over our engagement with companies, in two areas -assessment of probability of getting into difficulty….. and we need to look more carefully at stress testing issues.”