As it stated in the original report, released in March, the responsibility lies not just with Northern Rock but also with the FSA. This is reiterated in the updated report, but it also lays a significant portion of the blame at Northern Rock’s door.

According to the FSA, Northern Rock – which was the UK’s fifth biggest mortgage lender before the credit crisis erupted last summer – was in violation of its capital requirements, reporting a capital ratio of 7.74 per cent, which made it exceptionally vulnerable to changes in the wholesale market.

Northern Rock informed the FSA at the time, however, and experts have said the FSA would ordinarily have reacted strongly to such information, especially in light of further warning signs of trouble ahead. Instead, it allowed Northern Rock to waive the standard Risk Mitigation Programme usually required of every bank.

Other warnings included one from the Bank of England, which came as early as October 2006, informing the FSA that Northern Rock’s wholesale funding model was looking precarious, but still it did not take action.

The FSA also noted that in future it would have to pay more heed to potentially domineering and aggressive individuals on a firm’s board, and the longevity of members on the board to ensure they have adequate experience.

Of its own misgivings, the FSA said that it will improve training for its staff to ensure that they can cope with such potentially high-risk companies as Northern Rock.

“This programme is the response of the management of the FSA to the weaknesses identified in the particular case of the supervision of Northern Rock.” said Hector Sants, chief executive of the FSA. “It is clear from the thorough review carried out by the Internal Audit team that our supervision of Northern Rock in the period leading up to the market instability of late last summer was not carried out to a standard that is acceptable.”

However, he added that it “is impossible to judge” whether or not different action by the FSA would have affected the outcome in the Northern Rock case.

Having become out its depth with risky mortgage assets and being nationalised earlier this year, Northern Rock is now trying to recoup some of its losses and repay its contingency loan to the Bank of England by increasing its deposits, enticing new customers and attracting old ones back by offering competitive rates on its savings accounts.

© Fair Investment Company Ltd