The events of the autumn, culminating in the nationalisation of Northern Rock, have seen a predictable flurry of regulatory handwringing and consultation. Regulators' responses have taken the form of proposals set out in the recent paper by HM Treasury, the Bank of England and the Financial Services Authority (FSA) on financial stability and depositor protection. The consultation is a reaction to themes that have emerged from the credit crunch and the run on Northern Rock.
Arcane regulation
Northern Rock had a lower regulatory funding burden. Its business model allowed the once regional building society to become the fifth biggest national lender. However, Northern Rock relied on the wholesale lending market for funding, allowing it to support a mortgage book far in excess of its deposit savings. An inability to accurately assess counterparty exposures caused problems on the asset-backed securities market, and these spread to the interbank lending market. Banks stockpiled their...