The FSA 'fesses up to a lack of common sense

The official report from its internal audit division into the collapse is a shocking document, detailing sloppy record-keeping, lax supervision and a general ignorance of how to measure risk. To be fair, nobody else spotted exactly how the Rock would hit the rocks, although a conversation with some of the bears of banking shares a year ago would have been worth much more to the FSA's senior executives than a crash course in bank supervision.

Their biggest blunder was the failure to do anything about the break-neck expansion in the bank's mortgage lending. In its statement last September admitting that the game was up, Northern Rock boasted that it had raised its lending by 55% in the first eight months of 2007. This was against the background of rising interest rates, increasingly inf lated house prices, and constant warnings from Bank of England officials of the dangers ahead.

These had nothing to do with the Pillar 2 Internal Capital Adequacy Assessment Process under Basel II or any other arcane measures of banking prudence. Basic common sense says this rate of expansion in those conditions is asking for trouble.

The FSA should have smelled something wrong, even if it couldn't predict the closure of the wholesale money markets. The official report into the disaster comes close to admitting as much.

It concludes that "the supervision of Northern Rock was at the extreme end of the spectrum within the firms reviewed ... and that its supervision did not reflect the general practice of supervision of high-impact firms at the FSA".

It's cold comfort to the FSA top brass that they never wanted responsibility for bank supervision in the first place. It was forced to be a leg of the "Tripar-tite Authority" by Gordon Brown, when he created this pantomime horse to humiliate the Bank immediately after granting it authority to set interest rates in 1997.

This setup was widely criticised, and the Governor almost resigned. The FSA trains people to spot dodgy IFAs, put everyone off from buying life and pension policies, and to administer fines when companies confess to administrative errors (even when no customer has suffered). They couldn't tell the difference between a bank in trouble and a SIV with holes in it.

They can't get the staff, either. Even the Bank, with all its kudos, has a growing problem of keeping people, and turnover at the FSA is much worse. Modern banking is head-bangingly complex, and the banks themselves can entice the best employees away. Anyone who's been at the FSA for more than a couple of years is a veteran.

Perhaps the saddest paragraph in the report is the FSA's suggestion that it suspects there was nothing it could have done to prevent the collapse: "The board noted that, even if supervision had been carried out at a level acceptable to the FSA, it was by no means the case that would have changed the outcome."

Fittingly, for an organisation accustomed to dishing out blame, it's had to find someone to take it. Hector Sants has only recently stepped up to chief executive, and his predecessor John Tiner had already gone. It's rough on Clive Briault, who left last week "by mutual agreement", but he's probably glad to be out of this dysfunctional organisation.