Select Committee on Treasury Written Evidence

Letter from the Chancellor to the Chairman

  I wrote to you on 20 September explaining the arrangements the Treasury and the Bank of England had put in place to guarantee deposits in Northern Rock plc during the current instability in the financial markets. I am now writing to explain both the extension of these guarantee arrangements, as notified to Parliament on Tuesday, and the terms of the Bank of England's new facility.

  I recognise that it is standard practice when a department incurs a contingent liability in excess of £250,000 outside the normal course of business and for which there is no statutory authority, to inform Parliament of this and to explain the circumstances. Except in cases of special urgency such liabilities are only incurred 14 days after informing Parliament.

  In this instance it was impossible to observe the 14 day rule. The terms of the new guarantee and facility arrangements with Northern Rock were not concluded until early 9 October. I therefore wanted to be able to set out for your Committee our objectives in agreeing the main terms of these arrangements set in the context of our overarching approach to financial stability, which I am explaining to Parliament in my statement today. Details of these objectives, new arrangements and the consequent contingent liabilities are set out in an annex, which I am placing in the libraries of both Houses and releasing to the markets, as these details are market sensitive.

  The extended guarantee arrangements and the indemnity to the Bank of England set out in the attached note result in some extension of the contingent liability notified to you in my letter of 20th September. Should the Bank of England need support, provision for payment would of course be sought through the normal supply procedure.

11 October 2007

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