Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 60 - 79)

THURSDAY 20 SEPTEMBER 2007

MR MERVYN KING, SIR JOHN GIEVE, MR PAUL TUCKER, MS KATE BARKER AND DR ANDREW SENTANCE

  Q60  Mr Brady: And it is your understanding that that would apply whether it was a UK bank or a foreign bank operating in a UK environment?

  Sir John Gieve: If you have a foreign bank with a branch here obviously the lead on that is taken by their own supervisor and central bank in their country of origin. So, for example, if there was, I do not know, a French bank that had a branch here, the question of whether or not that needs liquidity support depends on its position in its home country and internationally. It is difficult to think of an example where there would be a purely British liquidity crisis for a branch of a foreign bank.

  Q61  Mr Brady: So UK depositors with such a bank can take no comfort from the guarantee that has come from the Chancellor?

  Sir John Gieve: The Chancellor's words are not specific on this and it would obviously depend on the circumstances, but generally the home country authorities would take responsibility for their banks, and that would apply to us, too.

  Q62  Mr Brady: Thank you. Can I ask just one other slightly different question to the Governor again. Governor, you said earlier that you had pressed strongly for the ability to conduct a covert operation. When did you press strongly for it? I was not sure whether that was a reference to the period when the Market Abuses Directive was under consideration or whether it was in the period since it had come into force.

  Mr King: No, it was during this particular crisis with Northern Rock where I found it hard to believe that a public policy intervention that was in the interests of everyone in Northern Rock could not go ahead because of a legal responsibility to disclose. There is wording in that Market Abuses Directive which would give you the impression that, in a case of financial distress, it would be possible not to disclose but we had to take legal advice. I would say this occurred in the period between about 22 August and the date on 9 September when it became clear that we were discussing seriously doing the lender of last resort operation and we were advised finally that it could not be covert, but Sir John was involved in many of the discussions here at the deputies level.

  Sir John Gieve: Can I just clarify one point about foreign banks. Of course many foreign banks form British subsidiaries here and they are authorised in their own right by the FSA, so the legal structure matters a lot here. I do not want to mislead you on that.

  Q63  Mr Mudie: I find it hard to believe and sad, I think, that you were warned by Mr Tucker—and I am speaking to the Governor and yourself—the relevant people were warned and the relevant institutions were warned in July about the problems that were there in terms of the money markets and yet took until 14 August for it to get on your desk and there be some thought of action. What I have heard today (which alarms me) is that you have spent some time in the last question telling us what you could not do but I am sitting here as a politician and I am thinking you are the Governor of the Bank of England, you knew about this in July, you gave it some attention in August before those crowds built up outside Northern Rock and it became an issue; what was the Bank of England's inclination or policy intention because you could not sit and do nothing, you knew there was a problem, you knew it was going to blow up in September because that is when Northern Rock was going for money in the markets in a major way. How was it going to be solved before you took that action in September? What was your plan?

  Mr King: The Bank of England is not responsible for individual institutions.

  Q64  Mr Mudie: Sorry?

  Mr King: The Bank of England is not responsible for individual institutions. We act when the FSA come to us and say, "We think an individual institution ... "

  Q65  Mr Mudie: That is nice to know, but the impression you have given this Committee is you were very anxious to do something, not the answer you have just given that it is nothing to do with us.

  Mr King: Can I just—

  Q66  Mr Mudie: You said it is not our responsibility but you have spent the time up to now saying, "We would have loved to have done something but it was a lack of legislation, it was this, that and the other," and I say okay, you appear to be very concerned and wanting to do something, you looked at various things and you found excuses for not doing them, so what on earth were you going to do?

  Mr King: Let me tell you an answer to that question.

  Q67  Mr Mudie: Good.

  Mr King: The problems in Northern Rock were drawn to our attention on 14 August.

  Q68  Mr Mudie: No, Mr Tucker—

  Mr Tucker: To be clear about what I said—

  Q69  Mr Mudie: Mr Tucker, I know what you said, you said that you became aware of the problems in the capital market and you sent it across to the relevant people and institutions. Northern Rock's business model is regarded as extreme. It works but it is extreme because it depends on cheap credit and easy money, liquidity at a high degree. You were telling people in the institutions and your own institution, the other departments and divisions, that we have got a problem, and anybody would have put two and two together and said which of our institutions is going to be hit first. Northern Rock was an obvious one and I am just saying that should have rung bells. Is that fair? Thank you, Mr Tucker. I am just saying in a well-run institution it should have rung bells and we would have expected the Governor of the Bank of England to say, This is going to cause us problems; what can we do?" We have heard he did say that and then he discovered that he could not do things. What could you do, what were you planning to do?

  Mr King: I will tell you what we were planning to do. The problems that could have arisen in all these institutions, Northern Rock and any other British bank were triggered by the events of 9 August and we knew that if this were to cause problems we could act as lender of last resort but a lender of last resort is a lender of last resort. If we had jumped in within a week and announced that we were lender of last resort to Northern Rock that could have been very damaging to the institution. We knew that we were there as the backstop, as lender of last resort.[2]


  Q70  Mr Mudie: So you were content to watch this impending disaster, this train running towards the buffers, you knew it was going to happen in September and you were saying, "I cannot do anything, but I will be the lender of last resort when it hits the buffers"? Did you tell the Government and did you tell the FSA, did you get that Tripartite Committee round the table? What did they decide to do, if anything, or did they sit with you and say—because this is the impression you have given which is horrifying—we do not know what to do. I will tell you what is horrifying, that on both things—your U-turn on three-month money and on Northern Rock—it was forced upon you by people queuing outside the building societies, not that you had a well-ordered plan, not that you were preparing plans; you just watched it hit it and you panicked because it hit the buffers?

  Mr King: I am afraid that none of that is true.

  Q71  Chairman: Answer that short question, Governor!

  Mr King: Indeed.

  Q72  Mr Mudie: It is a relevant question.

  Mr King: It is a very fair question and I would like to answer it.

  Q73  Mr Mudie: That is what ordinary people and that is what the City are asking.

  Mr King: Would you let me answer it. On 9 August the events were triggered that meant that the risks we had been warning about for a long time materialised. On 14 August we discovered that those risks were serious in Northern Rock. At that point there did not seem much point in blowing up the train before it hit the buffers because there was a long time in the intervening period in which we might be able to find a way for Northern Rock to survive. That was the main responsibility of Northern Rock's management. It tried to find funding and it tried to sell its assets. If it had been successful in these events then the problem would not have materialised. We knew that in the last resort we could be lender of last resort and we prepared for that. The way I would have preferred to be lender of last resort was not open to us but if we had activated lender of last resort earlier the same problems would have occurred beforehand without giving a chance to find another way out.

  Q74  Mr Mudie: There is a suggestion that TSB walked away from the table because you were unwilling to give that guarantee. I heard that it took you about nine days to get legal opinion, which I find alarming.

  Mr King: I am sorry, this is complete nonsense.

  Q75  Mr Mudie: Why did TSB walk away?

  Mr King: I have no idea what bid discussions were going on. I knew that there were some bidders interested. When I was asked last Sunday what the terms on which a bid could be completed were, I confirmed very quickly that we would roll over the lender of last resort facility to any bidder. I am absolutely in favour of having a bid as a long-run solution to Northern Rock if that can be achieved. I did not oppose a bid, I supported it, but last Sunday, Mr Mudie, only a Government guarantee would have stopped that run. A bid would not have done it nor would any other solutions.

  Q76  Mr Mudie: Let us just be clear. TSB were still at the table until last Sunday when they got word from you that the legal advice you had got meant you could not be the lender of last resort?

  Mr King: No, not at all. I was asked by the FSA whether in the event of someone bidding—and this was a generalised proposition, not a particular institution—

  Q77  Mr Mudie: Who asked you?

  Mr King: Callum McCarthy at the FSA. He said in the event of a bid being made would it be the case that the lender of last resort facility that had been put in place the previous Friday would be extended and rolled over to a bidder, and I said yes.

  Q78  Mr Mudie: Let us clear it up for the City and for the media. This has been in the press for some time that Northern Rock were touting themselves around, there were two British banks interested one of which was Lloyd's (who stayed the course) but they went away after getting bad news. Are you saying this took place last Sunday when they got the bad news? The City has got the impression they walked away long before that because they were told you would not agree terms.

  Mr King: That is absolute nonsense. The lender of last resort facility was only announced at seven o'clock in the morning on the Friday.

  Q79  Mr Mudie: It was only announced that you were going to be lender of last resort. Lloyd's TSB, it is rumoured, had put it as a condition of taking over Northern Rock and giving a market solution that would have saved all this nonsense, and they put that to you some time before.

  Mr King: That is not true.


2   Note from witnesses: I explained to Mr Mudie that, during the weekend after the lender of last resort facility was made available to Northern Rock on Friday September 14, I was asked by the FSA whether that facility would continue to be available in the event of a successful bid for Northern Rock. I explained that it would be. Back


 
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