FSA to Get Tougher after Northern Rock

Britain's financial watchdog will boost its supervision of top banks after admitting on Wednesday 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 Financial Services Authority said its supervision of the lender, which required 25 billion pounds in emergency Bank of England loans before being nationalized, was insufficient and it failed to follow up key issues, including the bank's business model in changing market conditions.

It also said it highlighted a lack of internal FSA checks over its own work and inadequate resources.

The watchdog said it now planned to employ a new group of supervisory specialists to review supervision of "high-impact" banks, to boost staff numbers and implement a minimum level of staffing for key firms, as well as improving training.

It will also increase its focus on liquidity, particularly for high street banks, and raise the emphasis on the competence of banks' senior management.

The near-collapse of Northern Rock in September left the FSA facing the biggest crisis since it was set up in 2000, accused along with other regulators of failing to do enough to prevent he first run on a UK bank in over a century.

"It is clear from the thorough review carried out by the nternal audit team that our supervision of Northern Rock in the eriod leading up to the market instability of late last summer as not carried out to a standard that is acceptable," Chief xecutive Hector Sants said on Wednesday.

"Athough whether that would have affected the outcome in this case is impossible to judge."

The report, presented to the FSA's board last month, is the first internal examination of the watchdog's handling of the crisis last year.

Since September, the FSA has shaken up its management, with several supervisors set to leave. It has also beefed up its supervision of banks and a hiring drive currently underway is
expected to boost its ranks.