Desperately seeking solutions

If any name or entity epitomises the recent credit crunch, it is Northern Rock. But the UK lender will also be synonymous with a wider upheaval in the banking system. Due to the UK lender's funding struggles, regulators are proposing a number of new liquidity and supervisory rules for banks.

Whether they are acting in haste is yet to be determined. If the Financial Services Authority (FSA), Bank of England and Treasury are given more powers to regulate banks' activities and take action when banks run into serious trouble, this could well avert another Northern Rock debacle. But as one commentator writes in this month's Mortgage Risk, the risk of moral hazard is heightened when more rules are introduced. David Lascelles, of independent thinktank Centre for the Study of Financial Innovation, explains that the more regulations imposed, the more the responsibility shifts away from lenders, and on to the enforcers of rules. Should a bank not be responsible for its own business decisions, and held solely accountable if those decisions (whether it be a novel funding model or lending policy) fail?

At the moment, it may seem banks need all the help they can get, and that some should not be trusted to look after their own affairs independent of the regulator. But the fact is, risks are inherent in every business model. A swathe of new rules, especially if they are hastily assembled to silence the critics, could be detrimental to the industry.

At the time of going to press, the government's detailed rescue plan for Northern Rock had also been announced. To help speed through a private sector bail-out of the lender, the government has proposed that its mounting funding debts be repackaged into government-guaranteed bonds and sold to the capital markets. As interested buyers have until February 4 to submit their revised takeover proposals, Northern Rock could soon know who its new parent is. As you read this, the bank could even have been temporarily nationalised - pleasing many taxpayers.

Some may question why the fate of one medium-sized lender is that important, given the wider turmoil still occurring in the market. But the bond proposal to save Northern Rock has more significance than many may think. As one securitisation expert points out in this edition of this magazine, if the government is prepared to guarantee these bonds, will that not give Northern Rock an advantage in the funding markets?

The securitisation sector is desperately searching for solutions that will reopen the market. Perhaps the government needs to offer its support here too, and not just to one lender.

Dippy Singh, managing editor.

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