Northern Rock exposed regulatory failings It was the first run on a British bank for more than 140 years but five years on from the collapse of Northern Rock, could it happen again? The short answer is maybe - but global and UK officials have responded with regulatory fixes, including some that could have made a difference. In retrospect, it was clear that the bank's business model of relying on short-term funding from the wholesale market to make long-term mortgage loans was inherently vulnerable to a loss of confidence. This problem was compounded by three key factors. Northern Rock's rapid growth was fuelled by aggressive lending to dubious borrowers. Its supervisors at the Financial Services Authority were distracted and philosophically disinclined to question its business plan and risk models. And the Newcastle-based bank exploited loose bank safety rules, leaving it with very little equity to absorb unexpected losses. "Since Northern Rock, almost every aspect of regulation has been reviewed, found wanting in some way and strengthened," says Clifford Smout, co-head of the Deloitte Centre for Regulatory Strategy. All banks now have to hold more top-quality capital, making them more resilient. But Northern Rock, as a relatively small domestic retail bank, would have escaped some of the most highly touted reforms, such as the additional capital surcharge for "systemically important financial institutions." It had no investment banking arm to be affected by the Volcker rule ban on proprietary trading or the UK ringfencing plan aimed at protecting retail banking from other activities. Tough new liquidity standards aimed at forcing banks to hold more easy to sell assets might have helped the Rock survive a short-term freeze on wholesale lending but the rules will not take effect globally until 2015. Regulators have yet to finish drafting a "net stable funding ratio" aimed at the mismatch between long-term lending and short-term funding. "It would have made a difference but let's not kid ourselves that it is all in place," says Jon Pain, a former FSA managing director now with KPMG, the accountants. We've got the illusion of saying we have done all these things but a number of them are years off. The UK is revamping its regulatory structure to address the FSA's failures before the crisis. An FSA internal audit found the bank's supervisors met Rock staff just seven times in the 18 months before the run, and failed to challenge its aggressive growth targets and reliance on wholesale funding. The authority has put in place tougher mortgage lending standards aimed at curbing loans to buyers without well-documented income and the new Prudential Regulation Authority, which will be part of the Bank of England from next year, has announced plans to be more aggressive and scrutinise bank business plans more closely.