Britain only has itself to blame for how problems at Northern Rock turned into the first run on a UK bank in 140 years, the European Union's top financial regulator, Charlie McCreevy, said in prepared remarks Friday.
Bank of England Governor Mervyn King has previously said it was impossible to have acted covertly to stabilize Northern Rock because that would have broken EU market transparency rules.
But EU Internal Market Commissioner McCreevy, in a speech due to be delivered in Dublin later on Friday, will say the blame lies with Britain for adding extra domestic requirements to the EU rules.
"Unfortunately, in recent weeks, gold-plated transparency rules stood in the way of the quiet resolution of a problem before it became a crisis," McCreevy will say. "The result was that transparency rules that were intended to underpin investor confidence, when put to the test, actually promoted investor panic," says McCreevy in the speech.
"Panic that culminated in a bank run -- averted only by a central bank lifeboat which in turn spread moral hazard throughout the system," he adds. "Clearly, transparency that culminates in panic, followed by a rescue, followed by the proliferation of moral hazard, is transparency that we would be better off without."
He also addresses other issues raised by the Northern Rock crisis. "Questions have begun to be asked as to what, if any, real value can be attributed to the company's shareholder equity, given the cost of liquidity to the business now.
"In this regard, the fact that Northern Rock's stock market capitalization stood at one third of its book equity when I checked it earlier this week and represents less than 0.7 percent of the book value of its total assets tells its own story."
Bare Bottoms Abound
McCreevy reiterates the need for market watchdogs to think before making changes in light of the summer's credit squeeze.
"Now that the tide has gone out, the state of undress of many participants in financial markets is there for all to see: bare bottoms all over the place."
He singles out some areas that may need changes:
- New Basel II rules that come in next year laying down how much cash a bank must set aside to cover risk will need further development. Northern Rock was able to show just weeks before it had to be rescued that it could afford a significant share buyback, he says.
- Accounting rules on valuing assets and liabilities, especially on "marking to model" and "marking to market", have thrown up disturbing anomalies that need looking at.
- Credit rating agencies, blamed by McCreevy and others for being too slow to warn investors, need to take "effective corrective action that strengthens confidence in their governance".
McCreevy says a governance structure that involves a direct reporting line from fully ring-fenced rating assessment functions to a supervisory rating sub-committee of independent directors of the rating agency boards might be a starting point.