By Clara Ferreira-Marques and Steve Slater
LONDON (Reuters) - A panic response to the near-collapse of Northern Rock would damage the UK regulatory system, Britain's financial watchdog said, warning the full lessons from the crisis would not be clear until 2008.
The Financial Services Authority, responsible for policing UK banks, is facing the biggest test since it was set up seven years ago, accused along with other regulators of failing to do enough to prevent the first run on a UK bank in over a century.
Thomas Huertas, head of wholesale and institutional markets at the FSA, said a first review of supervision in the wake of the troubles at the UK's fifth-largest mortgage lender would be complete early next year.
"One has to be cautious about rushing off after turbulence or a crisis to suggest legislative change," he said.
"We've had, in this country, the Dangerous Dogs Act and, in the United States, Sarbanes-Oxley. There is ample evidence that legislation made in haste can create significant harm. One certainly needs to draw lessons but one shouldn't rush," he said at the Reuters Finance Summit.
Britain's 1991 Dangerous Dogs Act has been criticized as a piece of legislation rushed in to appease public panic, while the impact of the Sarbanes-Oxley rules, introduced in the wake of the Enron collapse, has been widely criticized.
Britain has already brought in some changes since Northern Rock was forced in mid-September to turn to the Bank of England for emergency cash, including introducing a guarantee to back up retail deposits in UK banks.
But Huertas said it was too soon to decide on changes to Britain's "tripartite" structure regulating banks.
The government has indicated it does not plan any major changes to a structure that currently splits the responsibility for banking oversight between the Bank of England, the FSA and the Treasury -- despite calls to overhaul a system widely seen to have failed Northern Rock and its customers.
"It is important the review be a careful and thorough one, and we will certainly draw lessons from (it)," Huertas said.
ZERO FAILURE?
Britain's authorities have been at pains to say Northern Rock has not been rescued or bailed out, pointing out it is paying for its Bank of England loans. But the government's swift move to guarantee deposits has prompted questions over whether Britain is ready to accept the political and social cost of a major bank failure.
"It's a question for parliament," Huertas said.
"We have made the case that we should not have a zero failure regime, but we are accountable to parliament and if parliament were to decide differently, then regulation and supervision would have to adjust accordingly."
Northern Rock, which was dependent on wholesale markets for more of its funds than rivals, was hit after a credit crunch took hold of global markets suffering from the financial pain that spread from the U.S. subprime mortgage sector. Continued...
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