The City regulator was on Thursday facing criticism from MPs and investors that it failed in its job by not tackling Northern Rock’s aggressive financial practices before the bank ran into trouble.
Questions over the competence of the Financial Services Authority moved to the fore even as Mervyn King, Bank of England governor, was fighting to defend his own performance in the handling of the debacle. Mr King told MPs on the Treasury select committee that legislative shortcomings prevented him from stopping the bank run.
John McFall, the committee chairman, described Mr King’s testimony as “unconvincing”, and established a formal inquiry into the mess, which was on Thursday still driving down shares in the banking sector.
But much of MPs’ concern related to the FSA’s role. FSA officials acknowledged on Thursday night that the regulator had not foreseen a total drying up of liquidity in the money markets, nor had prepared banks for such an eventuality.
“The FSA has a lot of questions to answer ... about why Northern Rock wasn’t identified as the most obvious risk,” said Michael Fallon, committee vice-chairman, adding: “Callum McCarthy, [FSA chairman], now has arguido status” – Portuguese for official suspect, a reference to the Madeleine McCann case.
Some of the UK’s leading institutional investors, speaking on condition of anonymity, also turned on the FSA.
One said: “The FSA is the lead banking regulator. They can’t shirk that one.” Another said: “Northern Rock has fallen foul of the dislocation in markets. But the model was always vulnerable. Why wasn’t that spotted?”
Mr King and Sir John Gieve, the Bank deputy governor responsible for financial stability, were not off the hook after their often nervy performance in front of MPs. They were accused of being asleep at the wheel during August and creating greater unease with Wednesday’s U-turn to lend to banks against collateral that was much weaker than normal.
Mr King insisted that the decision was his and was made after more money market volatility earlier this week and to address concerns about the reputation of the British banking system.
Bank stocks tumbled on concerns of further contagion. Northern Rock shares plunged another 27.9 per cent, with shares in Bradford & Bingley losing 8.6 per cent, Alliance & Leicester falling 7.4 per cent, and HBOS shedding 4.2 per cent.