Northern Rock’s decade-long arc, from the demutualisation of the Newcastle-based regional building society in 1997 to the infamous queues outside its branches in September 2007, is one of the richest case studies in regulation. However, because it turned out to be only the precursor of a much larger crisis, it has been less well mined for learning than it deserves.
Now, ten years on, it’s worth taking another look at the history of Northern Rock, in the wider context of today’s post-crisis regulatory architecture and culture, and specifically through the lens of SMCR.
This isn’t the place for an in-depth study, but one of the most striking things about the story is how many aspects it has. In no special order, here are six of the main ones;
1. The Rock's demutualisation came towards the end of the decade-long movement, and few if any of those ex-building societies remain independent, several having got into their own version of trouble.
2. Regulators - first the Bank of England and the Building Societies Commission, then the FSA - were generally neutral about the movement, and were encouraging of the increased competition they brought to the banking sector, allowing the new banks to expand rapidly and develop new business models.
3. Politicians of all parties were more encouraging still, both of competition and of the innovative business models that were sometimes involved. One criticism of regulators that isn’t often made is that they weren’t sufficiently independent of political fashion. This is never easy but it is still worth asking the question.
4. Investors too tended to look very much on the bright side. They liked the growing deposit base, the increasing share of the always profitable mortgage market, the innovative use of securitisation, and the emphasis on internet banking (which helped grow those deposits while keeping costs down).
5. Northern Rock was poorly regulated. The bleakly honest 2008 Internal Audit report – see the link – tells the story of a firm that was at the tail end of several FSA restructures, with little continuity of approach, lots of opting out of supervisory process, poor record keeping and little communication across regulators as concerns began to emerge.
6. Northern Rock’s management and Board were criticised for a relative lack of banking qualifications, as were the regulators who approved them.
In the context of SMCR, there are at least four questions worth touching on:
1. Would the Northern Rock Senior Managers have been approved under SMCR? Hard to say, but it’s worth noting that the pool of potential directors and CEO hasn’t obviously become larger. Except that there is (rightly) more pressure to diversify Board and C-suite membership. However, this doesn’t obviously speak to more of the highly experienced, formally qualified leaders the Northern Rock outcry implied were needed.
2. Would Certification have made a difference? No, not obviously.
3. How about the Prescribed Responsibility regarding the firm’s business model? Possibly, but Northern Rock’s business model had been in plain sight for several years, and widely praised by many. So while it ultimately failed, so too did several others and there would be a good deal of hindsight involved in holding anyone to account.
4. What about the Conduct Rules? Possibly more promising but, like the recent Jes Staley case, it might have been hard to go beyond “due skill (and) care…”
Innovation is, of course, what Northern Rock was always about. That and competition. Understanding the risks of new business models is one of the most difficult tasks regulators have. And there isn’t a great deal of evidence they (or anyone) have the tools or the abilities to do it consistently well. Both are good – for markets, consumers and society broadly - but they come with risks that are often missed or underestimated. In any event, it’s not clear SMCR would have helped save Northern Rock.
Britain's financial watchdog yesterday enduring a public savaging the likes of which it has not endured since the collapse of Equitable Life. An internal audit into the regulation of Northern Rock identified a series of failings which threaten to badly undermine the reputation of the Financial Services Authority.