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Last Updated: Tuesday, 9 October 2007, 11:27 GMT 12:27 UK
FSA to 'learn lessons' from Rock
Hector Sants
Hector Sants, the Financial Services Authority's chief executive
The chief executive of the Financial Services Authority (FSA) has accepted that there are "lessons to be learned" from the regulation of Northern Rock.

Hector Sants was giving evidence to the Treasury Select Committee which is investigating the problems at the bank.

"In terms of the probability of this organisation getting into difficulty we had it as a low probability," Mr Sants told the committee.

"When events transpired that proved to be incorrect," he added.

Poisonous

The chairman of the FSA, Sir Callum McCarthy, was also asked whether relations with the Bank of England had become "poisonous" as a result of the Northern Rock crisis.

A report in the Financial Times last month quoted unnamed FSA officials blaming the Bank of England for the crisis - the first run on a British bank in more than 100 years.

"I have good and clear relations with the governor," Sir Callum said

But he avoided questions about whether he urged the Bank of England to provide more funding to the banking market.

Stress testing

The FSA is responsible for supervising financial institutions such as banks and it was asked why it was only doing a full review of Northern Rock's finances every three years.

Conservative MP Michael Fallon said: "You are dealing with a bank whose lending has quadrupled from 25bn to 100bn - it was taking one in five mortgages - and you were not doing a full assessment for three years."

Mr Sants replied: "I think there are lessons to be learned to be learned here with regard to our supervisory practice and I do think we need to look at our engagement with this company."

The last FSA full review of Northern Rock was in February 2006 although FSA officials had visited the company in July to question their "stress testing".

This is a process where banks and regulators examine what would happen to a bank's finances in a range of crisis scenarios.

Mr Sants agreed that there were problems with the stress testing which were not picked up earlier.

"We were uncomfortable with their scenarios but regrettably it was late in the day," he said.



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