City watchdog admits blunders that broke bank

The Financial Services Authority confessed it had failed to see the warning signs and that its supervision of the bank was "unacceptable".

The FSA's own findings amount to a damning admission that it was "asleep on the job" before the first run on a British bank for more than 140 years.

Northern Rock had to go to the Bank of England for emergency funding when it fell victim to the worldwide credit squeeze at the end of last summer. Depositorsqueued to take out their money and Northern Rock was nationalised, adding £100 billion to public borrowing.

Today's review by the FSA exposed how poor record-taking, heavy staff turnover and catastrophic misjudgment of the risks Northern Rock was running all contributed to the failure.

Incredibly, it was categorised as the least risky of the 38 retail banks the watchdog was responsible for monitoring. But the report said ultimate responsibility for the debacle "lay with the firm's senior management".

The report, based on 65 interviews with FSA staff and analysis of more than 250 paper and electronic files, identifies four failings:

A lack of "supervisory engagement" with Northern Rock management. The FSA team responsible for monitoring the Rock failed to tackle executives on the unique vulnerability of its business model to "changing market conditions". From the start of 2005 to the start of the crisis last August there were only eight meetings with its executives, compared with an average of 143 for each of the "big five" high street lenders.

A "lack of adequate oversight and review" by senior FSA management about its day-to-day supervision.

Not enough resources were devoted to the supervision of a firm which was taking huge risks. More than 20 staff were cut from the FSA division responsible for supervising Northern Rock over the four years before the collapse.

A "lack of intensity" by the FSA in the way in which it analysed information about Northern Rock.

The report concludes the botched oversight was "at the extreme end of the spectrum" and the failings "did not reflect the general practice of supervision of high impact firms at the FSA".

Chief executive Hector Sants today unveiled an overhaul of the way in which the FSA supervises big banks, including better pay for good quality supervisors to stop them being poached by the City. But he said: "Whether that would have affected the outcome in this case is impossible to judge."

John McFall, chairman of the Treasury select committee of MPs, told BBC TV's Breakfast programme: "We need a regulator that's alert to the issues, that is pro-active not reactive.

"It needs to head the problems off at the pass rather than hold a post mortem into what went wrong."

The Northern Rock debacle has already led to a major clearing out of staff who were involved in its supervision. Mr McFall added: "The chatter was out there. The FSA didn't pick that up."

Prime Minister Gordon Brown's spokesman said: "We welcome the fact that the FSA has conducted a very thorough review and is taking action as appropriate". In the Commons, Gordon Brown denied the tripartite system of City regulation he set up a decade ago had been found inadequate.

But Tory leader David Cameron called for the Bank of England to be given responsibility for oversight in future.