“The kind of open-ended breastfeeding of a private institution that goes on at the moment is the worst of all possible worlds.” (para 198)
Thus spake our old friend Professor Buiter, as he explained to the Treasury Select Committee how the hopeless Brown/Balls bank regulatory system has landed taxpayers with an open-ended commitment to prop up the Crock and all its various shareholders.
Most unusually the Committee's initial 181 page Report on the Northern Rock fiasco was published on Saturday. Presumably the Labour Chairman hoped thereby to muffle the explosions. Some hope.
The Report blasts the Brown/Balls system, not just in its operation during the crisis, but also its very design.
The Financial Services Authority takes the most severe roasting, its multiple failures of regulation spelled out in detail. But the Tripartite system itself- with responsibilities shared between the FSA, the Bank of England and the Chancellor- is also found to have failed and to require urgent surgery. And all the problems were compounded by lack of preparation and dithering.
Key points in the Report:
- "The FSA... failed to tackle the fundamental weakness in NR's funding model and did nothing to prevent the problems that came to the fore from August 2007 onwards. We regard this as a substantial failure of regulation." (Paragraph 42)
- "It was wrong of the FSA to allow Northern Rock to weaken its balance sheet [last summer]"(Paragraph 45)
- "The current regulatory regime for the liquidity of United Kingdom banks is flawed" (Para 52)
- "It was the responsibility of the Financial Services Authority to ensure that the work of the Board of Northern Rock was sufficient to the task. The Financial Services Authority failed in its duty to do this." (Paragraph 59)
- "The FSA appears to have systematically failed in its duty as a regulator to ensure Northern Rock would not pose... a systemic risk, and this failure contributed significantly to the difficulties, and risks to the public purse, that have followed." (Paragraph 66)
- "The Tripartite authorities and Northern Rock ought to have strained every sinew to finalise the support operation and announce it within hours rather than days of the decision to proceed with the operation... the Tripartite authorities and the Board of Northern Rock ended up with the worst of both worlds." (Paragraph 148)
- "It is unacceptable that the terms of the guarantee to depositors had not been agreed in advance in order to allow a timely announcement" (para 165)
- "The cumulative effect of these failures was to delay the guarantee until the evening of the fourth day after the run started and thus to make the run on the deposits of Northern Rock more prolonged, and more damaging to the health of the company, than might otherwise have been the case." (Paragraph 166)
- "Responsibility for the legislative framework rests with the Treasury. Two years ago a weakness in that framework appears to have been identified and by late 2006 had been classed as requiring “urgent” action. Between late 2006 and mid-2007, the measures to rectify this weakness appear to have been pursued by the Tripartite authorities with insufficient vigour." (Paragraph 280)
There's much more in similarly devastating vein.
The bottom line is clear: as we've blogged many times, the Brown/Balls Tripartite system is unfit for purpose. Moreover, those operating it- not least the Chancellor himself- are simply not up to the task.
The crucial missing institutional elements are spelled out in the Report's recommendations, and they're hardly rocket science:
- No proper deposit insurance, so punters panic on the pavements- the coverage needs to be much greater, much more clearly explained, and properly funded
- Nobody in overall charge
- No FDIC-style special resolution regime for busted banks (which allows the bank to be taken into special administration, the retail depositors paid off, and the bank sold or run off over a period)
Why weren't these things thought about in 1997? Yup- it's the usual half-baked Labour approach to institutional design (cf the NHS or regional government).
Another hallmark of Brown's governing style is obfuscation over figures, and on that, the Committee highlights the fact that we still haven't been told how much taxpayers are in for:
"State support for Northern Rock has involved the Government entering into contingent liabilities on a very large scale... The Government... should not have relied upon either the Bank of England or the Northern Rock to be the sole sources on the scale of the State commitment. The House of Commons should be updated about the scale of the commitment on a quarterly basis."
Remembering this is our money Brown's committing, and it would be kinda nice to be told how much. Especially since we now know taxpayers will be supporting NR with huge amounts of money for the next five years, and quite possibly longer (see previous blogs here, here and here).
As for the future, we're unconvinced by the Committee's plan for a semi-independent Deputy Governor working inside the Bank of England. A much cleaner solution would be a fully fledged independent depository insurance operation, like the FDIC, working independently.
Apart from that, the Committee has done a surprisingly thorough job.
Even if they won't help us sleep any better.