I spent the evening of September 13 as a guest of a well known mortgage lender. We talked about the credit crisis and the fact that Victoria Mortgages had just been forced into administration. We also discussed the state of the market in general and commented that other lenders might go the same way. One of the names mentioned was Northern Rock.
This is a bank that has grown to become the fifth biggest lender in the country by aggressive pricing using other people’s money.
Imagine my surprise when I woke with a sore head on Friday to hear that Northern Rock had approached the Bank of England to seek emergency funding. Then panic hit the streets as £1bn was withdrawn from Northern Rock and its share price fell by 31 per cent.
The question we should ask ourselves is could this situation have been avoided? Is it the fault of Northern Rock’s management, the Bank of England, the FSA or the Treasury? My conclusion is that only one of these organisations is charged with a statutory duty to maintain confidence in financial systems and that is the FSA. If this is its statutory duty, it has failed miserably in the case of Northern Rock.
Northern Rock apparently told the Bank of England on September 5 that it was in trouble and the Bank must have told the FSA. The FSA had plenty of time to come up with a plan of action that would promote confidence. However, it seems that it failed to realise that depositors would be worried about their bank seeking emergency funding.
The best it could come up with was a press statement on September 15 when chairman Sir Callum McCarthy said: “To be absolutely clear, if we believed Northern Rock was not solvent, we would not allow it to remain open for business. It is open for business and it can continue to receive deposits and allow customers to make withdrawals.” Apparently, the statement included legal denials which basically undermined the statement because they effectively made it clear that no responsibility or contractual or legal relations should be created as a result of the statement. That’s a mixed message, is it not?
Surely, what the FSA should have done is point out the facts of the Northern Rock situation. Even with the turmoil that the bank has suffered, it is expected to have underlying profits between £500m and £540m for 2007. Only 0.47 per cent of its residential loan book is more than three months in arrears for August compared with an industry average of 1.2 per cent. Hardly the figures of a badly run business.
This is the sort of information the FSA should have been sending out to the press, not the contradictory drivel that was released.
My assertion is that the FSA has a clear and statutory duty to maintain confidence in financial markets. My accusation is that this organisation is not fit for purpose. It constantly fails its statutory requirements and responsibility and I believe it is time that the FSA’s duties were given a full review by the Government. If a mere broker like me is aware that the Northern Rock could have a problem, surely the FSA should have been equally aware when this crisis started a month and a half ago?
Perhaps I am being harsh and it is too early to determine who is to blame for the PR disaster of the Northern Rock crisis but I think it is clear that the FSA’s system of insolvency regulation is not up to dealing with a loss of confidence in an institution. The reason why savers put their money in deposit accounts rather than the stockmarket is they believe it is free of risk. I think it is unreasonable to expect depositors to differentiate between the credit-worthiness of various financial institutions regulated by the FSA. Therefore, it is up to the FSA to provide depositors with guidance.
It is time we moved to the system that is used in the US, where 100 per cent of your deposit is underwritten. This should be the prime concern of the FSA over the coming months.
John Winful is a partner at Winful Associates