Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 260 - 279)

TUESDAY 9 OCTOBER 2007

SIR CALLUM MCCARTHY AND MR HECTOR SANTS

  Q260  Peter Viggers: Do you think that lessons have been learned about the Tripartite method of supervising banks and building societies?

  Sir Callum McCarthy: I think that one of the things that we need to do is undoubtedly to look at the lessons of the tripartite arrangements, and I am particularly concerned about issues affecting financial compensation and the need to have a bank insolvency route which enables us to deal with a bank in difficulty in a way which gives clarity and certainty to its customers so that the probability of the anxieties that led to the queues for Northern Rock is something that we can deal with. So I think those are very real issues.

  Q261  Peter Viggers: Would that involve the Financial Services Authority being given more authority or more power which is currently held by another body?

  Sir Callum McCarthy: Not necessarily. The issues that I have been dealing with I think are wider than that.

  Q262  Mr Brady: The Governor of the Bank when he came before us was very specific, that he believed there was the interaction of four different pieces of legislation that caused difficulties in the response to the Northern Rock crisis: the Market Abuse Directive, the takeover code, the nature of the insurance scheme and the way in which deposits are frozen in the event of administration. The answer you were giving a few moments ago seemed to suggest that you do not share that view?

  Sir Callum McCarthy: No. I am sorry, if I gave that impression it was not the impression I was trying to give. I was trying to reply to the earlier question in saying what are the issues, and two of the issues that I identified, namely the compensation scheme and what I described as bank insolvency but in fact another way of rephrasing it is the way you have rephrased it, are two of the four that were identified by the Government.

  Mr Sants: It is clear there was no consumer confidence in the authorities here, and that was no doubt a factor contributing to the bank run, and we need to give careful consideration to addressing those mechanisms for improving consumer confidence, which takes us back to the FSCS and the bank administration scheme. I think there is a strong argument that says that we might not have had those queues if consumers had had the confidence their deposits were safe.

  Q263  Mr Brady: So do you share the Governor's view that those four pieces of legislation need to be changed?

  Sir Callum McCarthy: I share his view that they are all important things to look at.

  Q264  Mr Brady: In answering questions earlier about the Market Abuse Directive specifically, I think it was Mr Sants who was saying that the inhibition appeared to arise really on the part of the responsibilities on the Board of Northern Rock rather than the regulatory authorities or the Bank. Would that be accurate?

  Mr Sants: The initial responsibility as to whether disclosure should be made undoubtedly rests with the board of a company, and in this particular case they felt disclosure should be made. We had, as you say, no reason to challenge that conclusion they had reached, that is absolutely right, and I would repeat the point I made earlier. I think it was clear that there could be sets of circumstances in which disclosure would have to be made and we ended up in one in this particular case.

  Q265  Mr Brady: Is it your view that under Article 7 of the Directive, which exempts central banks from its provisions, that that exemption is—

  Mr Sants: Does not apply to these circumstances.

  Q266  Mr Brady: So there was no impediment on the Bank acting as a covert lender of last resort, except that it would not remain covert because of disclosure from Northern Rock?

  Mr Sants: Correct, in relation to the circumstances they were in and concerned as to the implication of that facility in terms of its magnitude and implication for their profits forecast, and of course I repeat this is all a moot point once the leak had occurred. A more general point here might well be that it is very difficult going forward to imagine in modern society that it would be that easy to keep a covert operation of that size covert for any length of time anyway. There are other obligations here, particularly to credit agencies.

  Q267  Mr Brady: So do you think it would be sensible to look at changing the disclosure rules or not?

  Sir Callum McCarthy: I think the point that we both have been trying to make is, quite apart from the legal obligations, there are fundamental practicalities which are at least as important as the legal concerns.

  Q268  Mr Brady: So if the Directive had different provisions it might not have helped?

  Mr Sants: It might not have helped, no. We are expressing a view that it seems unlikely in the overall set of circumstances that prevail in the market-place today that keeping an operation of this size and complexity covert for any length of time is realistic, independent of the standing of the Market Abuse Directive.

  Q269  Mr Brady: But consideration was clearly given to that covert lender of last resort possibility. When it was decided that it would not be a viable possibility, did your advice change within the tripartite authorities?

  Mr Sants: No, our advice had been consistent. In this set of circumstances if they transpired we would not wish to disagree with the company's conclusion that was reached.

  Q270  Mr Simon: Sir Callum, have you ever boxed?

  Sir Callum McCarthy: Twice in my life.

  Q271  Mr Simon: It strikes me that this morning when confronted with uncomfortable truths you have consistently said "that is not a description that I recognise". I am going to present you with another description because it has also struck me that you may well be the Herol "Bomber" Graham of the financial services industry, a medium ranking British boxer who could not punch, who was the very antithesis of hard-hitting but upon whom it was impossible to lay a glove, you could not hit Herol "Bomber" Graham under any circumstances. It strikes me that during this fiasco the Governor and the Bank have got it spectacularly in the neck whereas you, who actually were responsible for looking after this organisation, this bank, seem to have absolutely no responsibility for any of this at all. Who was in charge of this bank? Who was in charge of making sure this did not happen?

  Sir Callum McCarthy: If I may be clear, I think both Hector and I have made it absolutely clear that the responsibility for supervising Northern Rock lies with the FSA, that is point one; and if that is not clear can I now make it clear to the Committee. We have also made it clear that we believe that there are things we need to look at again to make sure that we discharge those responsibilities in a way which recognises the lessons that we should learn from Northern Rock. If you have taken the impression that we are avoiding responsibilities that are properly ours, can I make it quite clear that we are not.

  Q272  Mr Simon: I was not asking who is responsible for supervising the institution; I was asking who is responsible for this crisis, this fiasco, this debacle? Which of the Tripartite Authorities ultimately was responsible the most?

  Sir Callum McCarthy: I am afraid that, rather like the Governor who answered the question, (I believe correctly) by saying here are the responsibilities of the Bank; here are the responsibilities of the FSA and here are the responsibilities of the Chancellor and the Treasury, I will give the same answer.

  Q273  Mr Simon: Do you think the Tripartite arrangements work?

  Sir Callum McCarthy: I think that they do work. If I look at the exchange of information which has taken place between the FSA, the Bank and the Treasury, I think that that exchange of information has been clear. I think that each of us has discharged our responsibilities.

  Q274  Mr Simon: So as a Committee we are supposed to conclude that these arrangements worked and that is why it all went so well?

  Sir Callum McCarthy: You are not supposed to conclude that things have gone well. If I may say so, Chairman, you will come to whatever conclusions you come to.

  Q275  Mr Simon: We are not likely to conclude that it worked very well, are we?

  Sir Callum McCarthy: You will come to whatever conclusion you come to.

  Q276  Mr Simon: There was a run on a bank; the nation was a global laughing stock; and you say that the arrangements worked?

  Sir Callum McCarthy: Sorry, I have said that the Tripartite arrangements in terms of what was done by each of the parties were clear in responsibilities, and in relation to the FSA, for which I take responsibility, I believe that we discharged our responsibilities. I also believe—and I repeat this—that we consider what has happened and particularly what happened in the supervision of Northern Rock up to the time that these problems developed, are things that we have to learn lessons from and make changes and respond to.

  Q277  Mr Simon: Given that you have said the arrangements worked, do you think they would have worked even better if one of the Tripartite parties had had more responsibility than the others, if there was somebody with whom the buck ultimately stopped (presumably not you)?

  Sir Callum McCarthy: If I look at the decision to extend facilities, it was a decision taken by the Chancellor on the basis of advice from both the Governor and the FSA, and I think that there is clarity of that responsibility. I am not quite sure what lies behind your question.

  Mr Sants: What is true, if you look at the period prior to the regrettable situation developing of the queues outside the bank—and I think, as we have indicated earlier, there are a number of contributory factors to that such as the limitations of the FSC Scheme and the Bank Administration Scheme which should be properly looked at—if you look at the period prior to that and ask the question whether something could have been done between the development of the global crisis which led to the freezing up of the access to liquidity and the bank applying for its facilities, realistically the only solution to the disappearance of commercial credit would have been the provision of some type of central credit. That is axiomatically true. There was a decision made not to do that, but if you look at the logical sequencing of events that is probably the only other thing that could have happened. A judgment was made not to do that. Let us just be clear, in terms of was there an option that was not considered and missed, then the answer to that is no. Were there options which were considered and the decision made for wider policy reasons not to do them, then the answer to that is yes. It is not obvious to us that there is some action that could have been taken by the FSA in that period that would have led to a different set of circumstances at the point the facility was leaked.

  Q278  Mr Simon: Relations between the FSA and the Bank have been described recently as "poisonous". What do you say about that?

  Sir Callum McCarthy: I would say that I have a good and clear relationship with the Governor. I believe that Hector and senior colleagues work effectively and well with their opposite numbers in the Bank, and it is a description which I in no way recognise.

  Mr Sants: I would say absolutely not true.

  Q279  Mr Simon: I thought we would get to "descriptions that you did not recognise", which reminds me of your answer to the Chairman, which I thought was disingenuous when he asked you about the spinners, you just said, "Spinners I do not know anything about spinners." Are you telling us now, on the record, that either the FSA does not employ people who spin on its behalf or that it does but you do not know anything about it?

  Sir Callum McCarthy: No, I am saying if, as I believe is the import of your questions, you are suggesting that the FSA goes around briefing against the Bank of England—


 
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