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Post-Northern Rock measures outlined

11/10/2007

Chancellor Alistair Darling has outlined measures to prevent another Northern Rock-style crisis.

Worried savers withdrew more than £2 billion from the bank last month, after it emerged that the troubled lender had asked the Bank of England for an emergency loan in the wake of an ongoing global credit crunch.

The Treasury subsequently pledged to guarantee savings held with Northern Rock in order to bring an end to the first run on a British bank in around 150 years.

Making a statement to MPs on the issue, Mr Darling proposed plans aimed at boosting consumer confidence in the banking system in the aftermath of the affair.

Explaining the background to the debacle, the chancellor said that difficulties faced by Northern Rock had been caused by a global credit squeeze which began in the US. Rising default levels in the American sub-prime mortgage market made banks more reluctant to lend cash to one another due to doubts about the extent to which they are exposed to bad debts in the specialist home-loan sector.

Mr Darling told the House of Commons that while the availability of credit had increased in the past few weeks, the UK could not be certain when the instability on the credit markets would end.

The chancellor repeated his assertion that Northern Rock's business model meant that it faced particular difficulties as a result of the credit crunch and said that the Bank of England and Financial Services Authority (FSA) had informed the Treasury of their concerns about the bank on August 14th – almost a month before the lender approached the central bank for emergency cash.

Mr Darling said that while there were "lessons to be learned" from the Northern Rock crisis, ultimate responsibility for minimising financial risk lay first with individual banks themselves.

However the chancellor said he would propose that the International Monetary Fund (IMF) should establish an "early warning" system, under which the UK would be given notice of events happening elsewhere in the world that could affect the country's economy.

Mr Darling added that the government was also launching a new discussion paper aimed at creating new measures to "insulate" depositors from any future bank collapse.

The government says it is seeking views on whether the current framework for dealing with banks in distress should be reformed, in particular whether further changes should be made to the depositor compensation system.

Earlier this month Mr Darling said the government would guarantee cash deposits of up to £35,000 held in all bank and building society accounts, while confirming that he was still considering whether to guarantee deposits up to a higher level of £100,000. Today's discussion paper makes no mention of the latter figure, but does ask whether the compensation should be raised again from its current level.

The chancellor said the changes he had announced would "strengthen our reputation as the world's leading finance centre".

But shadow chancellor George Osborne accused the government of failing its "first serious" financial test over the handing of the Northern Rock crisis and questioned why the chancellor had not done more to prevent it.

He also slammed the 'tripartite' system of financial regulation in the UK, with critics having suggested that muddled responsibilities shared between the Bank of England, the FSA and Treasury prevented earlier action being taken to tackle Northern Rock's problems.

"No one knows who is in charge," said Mr Osborne.

"The chancellor was supposed to be in charge, but he wasn't," added Mr Darling's Tory counterpart, insisting that the government had to make clear who was responsible for monitoring liquidity.