Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 150 - 159)

TUESDAY 9 OCTOBER 2007

SIR CALLUM MCCARTHY AND MR HECTOR SANTS

  Q150  Chairman: Sir Callum, welcome to the Committee. Can you identify yourselves for the shorthand writer, please?

  Sir Callum McCarthy: Callum McCarthy, Chairman of the FSA.

  Mr Sants: Hector Sants, Chief Executive of the FSA.

  Q151  Chairman: How much responsibility do you accept as an organisation for the recent damage caused to the UK financial system?

  Sir Callum McCarthy: I think that you have to look at the responsibilities of the FSA in relation to Northern Rock in respect of two periods. One is the way in which we discharged our responsibilities of supervision up to the time when market conditions became turbulent and difficult in August and the way in which we have acted since then. I am happy to describe, and I hope our memorandum to the Committee has described, how we went about it in both those periods.

  Q152  Chairman: How do you respond to the suggestion by the BBA that "our reputation as a country will not have been strengthened as a result of the wall-to-wall coverage of the queues" at Northern Rock?

  Sir Callum McCarthy: I have made clear that I regard the events of Northern Rock as having been damaging.

  Q153  Chairman: Do you think that the Bank was too wedded to the concept of a moral hazard and that liquidity operations should have begun earlier?

  Sir Callum McCarthy: Those are questions which, I think, have to be addressed to the Bank rather than to the FSA, but I would say that our responsibility in relation to the period when the difficulties of Northern Rock became clear were essentially three. One was to monitor the position carefully, the second was to give advice to the Chancellor in relation to insolvency and in relation to the systemic importance of Northern Rock and the third was to investigate whether there was a possible private sector solution, and I think that we did all three of those.

  Q154  Chairman: The reason I ask that question, Sir Callum, was quite simple. There was a Tripartite agreement with you talking to the Bank, talking to the Governor; so no doubt during these private discussions you would have had a view on this concept of moral hazard?

  Sir Callum McCarthy: Indeed, yes, Chairman.

  Q155  Chairman: What was your view?

  Sir Callum McCarthy: I think that there it is an important question of balance between the issues of moral hazard, which the Governor addressed very clearly in his memorandum to this Committee and what I would call the problem of damaged innocent bystanders in the sense that there is a problem associated with a worldwide liquidity drying up, which affects not only people who have played a part in arguably irresponsible behaviour, which is the Governor's concern, but much more widely in terms of other people who can possibly be harmed by that event.

  Q156  Chairman: So you agree 100% with the Governor?

  Sir Callum McCarthy: No, the Governor's document was his document. I am saying it is a question of balance.

  Q157  Chairman: I am asking if you agree 100% with the Governor on that subject.

  Sir Callum McCarthy: I think that it is possible for people to have different views, and my own view of the balance between the moral hazard arguments and the other instances is slightly different from the Governor's.

  Q158  Chairman: In what way is it different? Could you speak up, please?

  Sir Callum McCarthy: It is different because I place a slightly different weight on the difference.

  Q159  Chairman: In what way is it different? The reason I am asking this is to ensure that we get a satisfactory solution to the future and we never see a bank run again.

  Sir Callum McCarthy: I very much hope that we avoid future bank runs actually.


 
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