Treasury Committee calls for creation of major new post within Tripartite Authorities in wake of Northern Rock
The Treasury Committee today publishes its fifth report of Session 2007-08, The run on the Rock (HC 56-I). The report recommends that a single authority be given new powers for handling failing banks, together with responsibility for a new Deposit Protection Fund.
Committee chairman, John McFall MP said:
“Our report has been unanimously agreed. It recommends a radical shake-up at both the Bank of England and the FSA. Both have been found wanting with regard to financial stability. Accordingly the Committee has identified a need for a new office of Deputy Governor of the Bank of England and Head of Financial Stability. This individual should be one of the principal channels of advice to the Chancellor of the Exchequer on financial stability. If the government wants a fair wind for their reforms to the Tripartite arrangements in parliament, they must take seriously the cross-party recommendations in this report, which represent the will of parliament. The report removes party politicking from an issue which affects every citizen each and every time they use the services of a bank. The Treasury Committee was asked by all the Tripartite authorities to deliver a unanimous report. We have accomplished that task.”
Dealing with failing banks:
The report recommends a series of measures for handling ‘failing’ banks in an orderly manner and in a way that insulates taxpayers and small depositors from the risk of banks failing. Key amongst these are:
Taking a prompt corrective action approach after using judgement supplemented by a series of quantitative triggers. To aid this the relevant authority should have the power to acquire information relating to individual financial institutions and to take action in relation to an institution in a series of specified circumstances.
The establishment of a special resolution regime for failing banks to enable the continued smooth running of such a bank, while measures are taken to restore it to health, or ensure an orderly failure.
A deposit protection scheme which is simple, transparent and allows the speedy release of funds is of critical importance. The report proposes measures to provide for this and recommends the establishment of a Deposit Protection Fund, to be pre-funded by participating institutions, to obviate the need for the Government to step in and rescue a bank.
John McFall commented:
“Banks should be allowed to fail to ensure market discipline, but only in an orderly manner. The recommendations in our report provide bank customers with new protections in the form of a Deposit Protection Fund and a special resolution regime for banks. Customers in a failing bank must be assured their guaranteed deposits are readily available. With measures such as these there should be no reason for the queues in the streets that we witnessed in August to form ever again.”
The report concludes that the directors of Northern Rock were the principal authors of the difficulties that the company has faced since August 2007. The directors pursued a reckless business strategy which was excessively reliant on wholesale funding. However, the Financial Services Authority also failed in its duty as a regulator of Northern Rock.
The Chancellor of the Exchequer was right to authorise the Bank of England’s support facility. However, the Tripartite authorities did not prepare adequately for that support operation. Those authorities and Northern Rock ought to have strained every sinew to finalise the operation and announce it within hours rather than days of the decision to proceed with the operation. The Tripartite authorities at deputies level also failed to plan for the announcement of the Government guarantee on Northern Rock deposits that proved necessary to stop the run.
John McFall commented:
“The failure of Northern Rock, while primarily a failure of its directors, was also a failure of its regulator. The FSA appears to have systematically failed in its duty and this failure contributed significantly to the difficulties and risks to the public purse that have followed.”
The report concludes that a key weakness of the Tripartite authorities was the failure, or absence of, a coherent communications strategy and recommends they revise their communications arrangements for future crises, to ensure a single, coherent and coordinated message. This message needs to take into account the public’s likely reaction, and be in language people can readily understand.
John McFall said:
“Planning must begin immediately so that on any future occasion it is known who will speak for the authorities and that their message is clear and reassuring. A strong coordinating influence from one office will surely help with this.”
The Committee looks forward to the Government’s response to its recommendations. Its second report under the theme of Financial Stability and Transparency, providing a wider perspective on the events in international markets which contributed to the problems at Northern Rock, will be published in due course.
John McFall said:
“This is not the end of the story. Today’s report relates to the events surrounding the run on Northern Rock and the lessons arising from it, from which we have drawn cross-party recommendations for early legislative action. The Committee will be also soon be publishing a report covering wider issues relating to Financial Stability and Transparency in the UK and internationally.”