FSA admits Northern Rock failings

By Clara Ferreira-Marques

LONDON (Reuters) - The Financial Services Authority will boost its oversight of the country's largest banks after admitting that its supervision of Northern Rock was unacceptable and failed to highlight the mortgage lender's vulnerability.

In an internal report published on Wednesday, the FSA said its supervision of the lender, brought into public ownership last month, was insufficient and failed to push hard enough on key issues, including the bank's business model and increased risks as market conditions deteriorated.

The review also highlighted insufficient internal FSA checks over its own work -- blamed on a lack of continuity in department heads and on high staff turnover -- and said budget cuts meant it had inadequate resources focused on the bank.

The crisis at Northern Rock, which has borrowed 25 billion pounds from the Bank of England since last September, has shaken public confidence in Prime Minister Gordon Brown's government and raised questions over the regulatory system which underpins Britain's financial services.

It has left the FSA facing the biggest crisis since it was set up, accused along with other regulators of failing to do enough to prevent the first run on a UK bank in over a century.

The FSA said it would stick to its risk-based approach to regulation but implement lessons from the review, shaking up its oversight of "high impact" firms -- banks whose failure would threaten the financial system -- and boosting staff by 10 percent, including around 100 more supervisors.

"The failure of Northern Rock should first and foremost be attributed to the failure of its board and executive to create a durable funding model," FSA Chief Executive Hector Sants said.

"Nevertheless, the FSA acknowledges that its supervision... in the period leading up to July 2007 was not of sufficient intensity or appropriate rigour to challenge the company's board and executive on their risk management practices..."  Continued...