No one thought Northern Rock was the start of a global crisis
10 years after run on the bank, City peer reveals . . .
NO ONE realised the collapse of Northern Rock was the start of a full-blown financial crisis, the former head of the City watchdog has revealed.
Speaking to mark the 10th anniversary of the failure of the bank, Lord Turner told how regulators believed bailing out the stricken lender would be enough to shore up Britain’s financial system.
The ex- chairman of the Financial Services Authority told the Mail he was surprised when the crisis escalated in 2008 and it was only in January 2009 that he realised that the UK was heading towards a ‘very, very deep’ slump.
But he told how world’s top economists and central bankers were ‘complete rubbish’ in foreseeing the financial crisis and that many thought he was crazy when he warned that savers could be forced to suffer a decade with rock-bottom interest rates as a result.
Turner, who was parachuted into the Financial Services Authority as chairman in May 2008, said the FSA ‘was making enormous mistakes’ but they were made against a ‘set of intellectual assumptions’ which proved wildly wrong.
He told the Mail: ‘ I thought Northern Rock was a real cock-up in an individual financial institution rather than something that was the harbinger of a wider financial crisis.’
On Turner’s watch the FSA tested the system to see what would happen if interest rates returned to 5pc very quickly.
‘I said I would also like to see what happens if interest rates stay at 0.5pc for the next ten years,’ Turner said. ‘I think they thought I was crazy.’ He doesn’t spare the blushes of his predecessor as chairman, Sir Callum McCarthy. Turner said: ‘He was there for five years up to September 19, 2008, and he literally left a ship that was sinking.’ Turner, who works for a City hedge fund, blamed the crisis on the extraordinary increase in leverage that had built up in the financial system over 50 years,
He blames this on Alan Greenspan, the former chairman of America’s central bank the Federal Reserve.
Turner said: ‘There was an entire global philosophy, supported by a lot of clever people, in particular Alan Greenspan, that the financial system was such a smart and selfregulating system, self-adjusting system, that you could rely on it not to do crazy things.’
He believes that Gordon Brown’s government made an error when it removed scrutiny of the banks from the Bank of England to the newly created FSA in 1997. ‘The FSA was engaged in light touch regulation on the prudential side, on the issue of bank capital and in terms of supervision,’ he said. ‘The most fundamental problem was that global bank capital requirements were wrong. Not just wrong by a small amount, they were massively wrong.’
Turner says that if he had total freedom to set the rules now he would insist that banks held 20pc capital and if it ever fell below that figure then the Government should step in and ‘nationalise without compensation’.
When the Rock failed the view among politicians, regulators and central bankers was that this essentially was a one-off for a bank which had an extreme model, including lending 125pc mortgages.
As FSA chairman Turner would have liked to have seen Northern Rock’s founder and other bankers at the core of the crisis punished. ‘But in a country driven by the rule of law you can only hold people to account by the laws and regulations at the time.’