Handling Of Northern Rock Crisis Criticised
Professor Willem Buiter, a former Bank of England member of the Monetary Policy Committee, said earlier that the government and Bank should have allowed Northern Rock to collapse.
The professor is now at the London School of Economics. He said that money from the Bank of England - therefore money from taxpayers - should only be lent out if the whole banking system was at risk, but this had not been the case in Northern Rock's situation. Buiter said that Gordon Brown has set up a fundamentally flawed bank regulation system. The professor claimed that Northern Rock was not large enough to warrant a bailout, and did not pose a significant risk to the banking system. He thought it would be "better to let it go".
The bank run was firmly the fault of No. 10, said Buiter, commenting on the tripartite regulation system under which the Bank, the Treasury and the Financial Services Authority oversee British banks. The system was set up by Chancellor Mr Brown in 1997, meaning that the FSA has the data, the Treasury gives the go ahead, and the Bank has the money. The structure, said Professor Buiter, was a shambles, with three organisations involved and unable to act with the speed necessary at critical times.
"The main problem is that it puts information about banks that may be in trouble with one organisation - the FSA - and the money to do something about it in another - the Bank of England. That splitting of the information and the money is unwise," said Professor Buiter.
"By the time it gets to the [crisis] point, the Bank does not have the information, and has to be brought up to speed by the FSA. It is just a way of losing time and putting yourself in a situation where you are almost bound to miss the opportunity for killing the crisis off at an early stage."
The Government had ignored previous criticisms regarding this three-way system, he said. Professor Buiter was always regarded as a renegade on the MPC, but delivered this same message to MPs on the Treasury Select Committee this week. His suggestion is to "either take the information to the money - give the Bank of England back power to supervise and regulate banks as it did before 1997, or take the money to the information - provide the FSA with the resources".
The problems at Northern Rock - which are also threatening to engulf even bigger banks such as Barclays and HSBC - have prompted an investigation into the way British banks report their finances. The Financial Reporting Council has pointed to the sector as being at risk and has asked its watchdog - the Financial Reporting Review Panel - to check banks' accounting and balance sheets. We are coming to the third-quarter reporting period and there is some anticipation of bad news to come.
The FRC said: "The Review Panel will pay particular attention to disclosures relating to financing arrangements and risks and uncertainties in the light of credit market conditions at the time of approval of financial statements."
Published on November 19, 2007
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