A Failure of Regulation: There Is a Bank Crisis in Britain Every Decade-But in the Case of Northern Rock, Gordon Brown's Actions as Chancellor Are Coming Back to Haunt Him

By Brummer, Alex | New Statesman (1996), September 24, 2007 | Go to article overview

A Failure of Regulation: There Is a Bank Crisis in Britain Every Decade-But in the Case of Northern Rock, Gordon Brown's Actions as Chancellor Are Coming Back to Haunt Him


Brummer, Alex, New Statesman (1996)


By my reckoning, the failure of the Newcastle-based mortgage bank Northern Rock was long overdue. Recent history shows that Britain has a banking crisis once a decade. In 1973-74, at the height of the oil crisis following the Yom Kippur War, it was the fringe banks that went under and the then mighty NatWest (now part of the even mightier Royal Bank of Scotland) that came under scrutiny.

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In 1984 the Bank of England had to come scurrying to the rescue of the banking division of the historic firm Johnson Matthey. At the turn of the 1990s the infamous Bank of Credit and Commerce International, riddled with fraud from Miami to the City of London, was allowed to go under, followed by Barings in 1995, when the rogue trader Nick Leeson ended the life of an institution dating back to 1762.

All these instances of British banking failure, and in some cases rescue, have a theme in common. When the crisis is over, regulatory mistakes are nearly always seen to be among the problems. Somewhere among the boxes of documents in the regulators' vaults, or these days in the back-up computers that hold the email records, is a killer document or memo swept under the carpet or ignored by those responsible.

As a financial journalist who has monitored such scandals for more than 30 years, I am in absolutely no doubt that the same will be found with Northern Rock. Not because I believe that the amiable Northern Rock boss, Adam Applegarth, is a fraudster like the chaps who ran BCCI or like Leeson at Barings, but because the regulators allowed him to act in a manner which eventually was so obviously irresponsible, that they should have blown the whistle before taxpayers' money had to be put at risk.

A number of obvious questions should have been asked long ago. How is it that a second-tier lender, far smaller than the main clearers HSBC, Barclays, Royal Bank of Scotland and HBOS (which owns the Halifax), managed to snap up a 19 per cent share of the mortgage market over the past six months?

Why was it that Northern Rock, alone among British banks and mortgage lenders, was so dependent on unreliable wholesale markets for its funding? Seventy-five per cent of its funding came from these markets. Like the notorious American sub-prime lenders, the Rock had packaged up the mortgages of ordinary British borrowers and arranged for them to be turned into securities that were then sold for cash. Just 25 per cent of the Rock's deposits came from ordinary retail customers. …

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