Examination of Witnesses (Questions 260
TUESDAY 9 OCTOBER 2007
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
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
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
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
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
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
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
Q270 Mr Simon: Sir Callum, have you
Sir Callum McCarthy: Twice in
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
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 believeand
I repeat thisthat 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 bankand 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 atif 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
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