The greatest blank cheque in history

From poor regulation to inept communication, mistakes were made at every stage of the Northern Rock crisis. Simon Nixon explains why the run on the bank should never have happened - and why the Bank of England's subsequent U-turn could have dangerous consequences for us all.

I wrote last week that the outcome of the credit crunch lay largely in the hands of policymakers. Get it right and it could all blow over; get it wrong and we could be in serious trouble. I also wrote that, with the UK potentially most vulnerable to the turmoil, the UK authorities would be tested more than most. But I never imagined that, days later, they would be tested in such spectacular fashion and found desperately wanting. The run on Northern Rock the first run on a mainstream lender for 100 years should never have happened. And it raises troubling questions about the credibility of the UK regulatory system in general and the Bank of England in particular.

Mistakes were made every step of the way. The first was to have allowed Northern Rock to get into the position where it needed emergency funding. This crisis did not emerge as a bolt from the blue. Many in the City had been warning for years that the bank's business model left it vulnerable to a credit-markets squeeze. Funding long-term mortgage lending with short-term borrowing was asking for trouble. A robust regulator should have insisted Northern Rock maintain tougher capital reserves to reflect its high-risk strategy. Instead, the Financial Services Authority allowed it to continue its breakneck dash for growth, increasing its dependence on the capital markets.

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Simon Nixon

Simon is the chief leader writer and columnist at The Times and previous to that, he was at The Wall Street Journal for 9 years as the chief European commentator. Simon also wrote for Reuters Breakingviews as the Executive Editor earlier in his career. Simon covers personal finance topics such as property, the economy and other areas for example stockmarkets and funds.