Reacting to Northern Rock

Author: | Published: 1 Nov 2007

The recent precipitate reduction in credit market liquidity has lead commentators in the UK to call for more regulation. They have pointed variously to (i) requirements for more disclosure of credit derivative holdings; (ii) reform of accounting standards and regulatory reporting requirements; and (iii) regulation of rating agencies. In the UK, following the travails of the Northern Rock Building Society, there has also been debate about the effectiveness of regulatory supervision. The ability of a tripartite regulatory structure constituted by the FSA, the Bank of England and the Treasury to respond to a banking crisis has been put under scrutiny. This article considers how the credit markets' should be regulated.

Banks' extensive use of credit derivatives and securitisations has reduced the transparency of the location and concentration of credit risk. It has not fully insulated financial institutions from credit default liabilities and losses. However, regulation of banks and investment businesses...