Sir, After the collapse of Equitable Life in 2000, the FSA set up a review team on the regulation of the assurance society. Among the important “lessons to be learnt”, identified in 2001 were, and I quote verbatim, that “the FSA management take steps to ensure that the supervisory team is properly constituted with persons with the necessary expertise and knowledge”; and that “assessed financial risk must be an integral part of an overall risk assessment which is consistent, and consistently applied, across the FSA”.

From the recent internal audit by the FSA on its regulation of Northern Rock we learn (report, March 27) that the bank “was monitored by supervisors with expertise in insurance, not banking”; that “formal records of supervisors’ meetings with the FSA’s risk assessment panel to discuss Northern Rock were not kept, nor did supervisors give the panel any developed financial analysis on the bank”; and that “supervisors did not issue the bank with a risk-mitigation programme that would have forced it to address its risks”.

The issues identified in the recent internal audit were therefore all highlighted in the 2001 internal audit. What is the point of internal audits that are simply ignored?

Dr Andrew Goudie

Spital, Wirral

Sir, As one who supervised the insurance industry in the somewhat turbulent 1970s, may I offer some suggestions about the possible role and powers of a banking supervisor?

The first essential requirement is regular access to information, with additional details when deemed necessary. Among the signs of possible problems are rapid expansion, especially when connected to innovation. The more attractive the new line, the greater the risk if something goes wrong.

Secondly, the ability to consult other relevant bodies in confidence. We worked closely with the Government Actuary and the Bank of England. Thirdly, the ability to require the bank to restrict its business, especially in risky lines.

Finally, and most important, to bear in mind Morris’s First Law of Prudential Supervision — that there is no limit to human ingenuity in finding new ways to go bust.

Michael S. Morris

London NW7

Sir, Gordon Brown said in Parliament that the FSA was concentrating on solvency, not liquidity. He went on to say that it had to do better on liquidity, but it had assured itself about the solvency, so stop blaming it.

Given that the basic business of banking is lending long and borrowing short, and that banks are therefore absolutely dependent on confidence in their ability to repay any depositor (creditor) on demand, bank regulation the world over pays just as much attention to liquidity as solvency, and has since the days of Bagehot; for Mr Brown to suggest that the FSA is not to blame for doing otherwise is deeply dishonest, and given that he must know that no one with the least knowledge of finance will believe him, the statement shows an utter contempt for the public.

Paul Samson

St Genis-Pouilly, France

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