Watchdog 'failed' on Northern Rock

The Financial Services Authority (FSA) committed a "systematic failure of duty" by failing to spot the bank's "reckless" business plan, the Treasury Select Committee said.

A delay in an announcement from Chancellor Alistair Darling guaranteeing customer deposits also "prolonged" the run on the bank by panicked customers last September, the MPs said, and was "more damaging to the health of the company than might otherwise have been the case".

Newcastle-based Northern Rock owes the Bank of England about £24 billion after soaring borrowing costs forced it to seek a funding bail-out last September. The leaking of the news on Thursday September 13 triggered a rash of panicked withdrawals as savers queued for their money.

Committee chairman John McFall said: "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 Treasury Select Committee said the Tripartite authorities - comprising the Treasury, Bank of England and the FSA - decided to announce funding for the bank on Monday September 17 - two weeks after it had been agreed in principle by the Chancellor and a week after emergency funding was deemed necessary.

Northern Rock and the authorities should have "strained every sinew" to finalise the support operation and announce it within hours rather than days of the Chancellor's funding decision, the committee said.

Chancellor Alistair Darling decided on the Sunday to give the Government guarantee, but the announcement was not made until 5pm on Monday, after the markets had closed.

The MPs also criticised the "failure or absence" of a communications strategy between September 10 and 17.

The FSA did not act until the credit crunch had gripped money markets in early August and Northern Rock's "stress-testing" of its business model - relying on wholesale lending rather than deposits to fuel its business - was inadequate, the report said. Mr McFall added: "The FSA did not supervise Northern Rock properly. Its procedures were inadequate to supervise a bank whose business grew so rapidly."