Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 280 - 299)

TUESDAY 9 OCTOBER 2007

SIR CALLUM MCCARTHY AND MR HECTOR SANTS

  Q280  Mr Simon: That is what the Chairman suggested.

  Sir Callum McCarthy: Could I just make it clear that if I knew of anybody within the FSA doing that I would fire them.

  Q281  Mr Simon: Will you undertake to find out?

  Sir Callum McCarthy: I have no reason to believe that what you are suggesting has any truth. If I discovered that it were true, I would take action.

  Q282  Mr Simon: What kind of things would need to happen to you to make you believe? Everybody else in this room knows that this has happened; you are the only person here who does not believe it. What would we need to do to convince you that this kind of thing goes on and that your organisation that you are supposed to be in charge of is doing this and has been doing it so disgracefully that the Chairman of the Treasury Committee mentioned it to you right at the top of his remarks and you just say, "I do not know anything about it. I do not get involved in that sort of thing." You are involved in that sort of thing.

  Sir Callum McCarthy: If you could provide chapter and verse and evidence other than assertion, I would take it seriously.

  Q283  Mr Simon: But without chapter and verse and evidence you do not take it seriously?

  Sir Callum McCarthy: I am afraid it is an assertion which is so contrary to the clear policy that is established at the top of the FSA, and which has been made absolutely clear, that I do not believe it is true. I do not know if you want to add to that, Hector?

  Mr Sants: No, I think you are very clear on our position.

  Q284  Chairman: How many press officers do you have, Sir Callum?

  Sir Callum McCarthy: Do you know the answer?

  Mr Sants: Not to the precise one. I think we have a quantum of ten to 15, about a dozen or so, covering a variety of different issues, which of course include retail issues and consumer communications.

  Chairman: In your responses before next week in your letter to us, if you could look at that report that was in the Financial Times and give us your comments on it and consult your press officers, that would be helpful to us in our inquiry. George?

  Q285  Mr Mudie: I think there can be some criticism of not anticipating what happened before it happened and your supervision role, but I would like to just push further on what you said, Hector, about there was a big option and you were working against a decision by one of your partners which was not to put liquidity into the situation. That seems to me something that exacerbated and brought on the crisis, which has not happened in Europe and has not happened in the States because the central banks behaved differently. Would you care to comment?

  Mr Sants: I think it is logically true and I have already indicated that, and I would agree with you, from the narrow question of would we be in the position we are now in with regard to Northern Rock, it clearly is the case that if liquidity in smaller amounts had been made available to Northern Rock earlier, then it is quite possible it would not then have subsequently needed to apply to the lender of last resort facility. In terms of that narrow question of that particular institution, for the reason I have just said, namely the public markets were closed to it. Its problem was a liquidity problem—we have discussed that—and therefore if it had been able to find a source of liquidity prior to applying for a lender of last resort facility then it might not have needed to have done that, and that absolutely has to be case.

  Q286  Mr Mudie: That is the situation, if there had been the liquidity engineered by the central bank, you would not have needed to be seen or classed as a lender of last resort. You would have gone to the market the same way as any other bank could have gone, taken the money, freed yourself from your short-term financial difficulties and got on with life, and we would not have had these queues and this crisis.

  Mr Sants: I think, as I have just said, I am agreeing with you with regard to the narrow point of Northern Rock. There are two particular ways that could have been addressed, either a facility where wider collateral should be more generally available, or some specific approach taken with regard to less general facilities but nevertheless still of a more generic nature, however, questions are rightly to be taken by the Bank in the context of their overall policy framework, as to your question for Northern Rock, I think the answer is yes.

  Q287  Mr Mudie: It goes beyond Northern Rock. Let us take the Tripartite arrangements, did at any time the FSA, as part of that, raise the question of the central bank putting some liquidity into the system generally? Yes or no? I think we are entitled to know what the FSA's view is. You have been hauled over the coals today for a situation which was maybe somebody else's creation, so did you at any time during these arrangements as the crisis developed say this could be sorted if you come off your high moral platform and just do what the Fed did or the ECB did?

  Sir Callum McCarthy: May I make two points. One is I would point out—

  Q288  Mr Mudie: No, Sir Callum, just answer the question in terms of was this specific approach/strategy raised?

  Sir Callum McCarthy: One of the things that was done was, as you would expect us to do, after meetings that were held at chief executive level with some of the major British banks where they expressed their views (meetings that were attended by Bank of England officials) we reported the views of those people very clearly to the Bank.

  Mr Sants: We clearly are very aware of our responsibility to interface with the market. I think you rightly point out that the majority of the market held the view you have just described and we very properly made sure, as the banks expected us so to do, that those views were communicated on to the Bank on a regular basis.

  Q289  Mr Mudie: And would you not agree that for the Governor to spell out in written form in such a lengthy way to this Committee the fact that liquidity would not be given, when you all knew you were in an advanced stage of a crisis, was not helpful?

  Sir Callum McCarthy: I would point out that at the time the Governor wrote to this Committee he knew that there was the probability of a lender of last resort facility being made available and his paper for this Committee specifically discussed that. I am sorry, I do not have the Governor's paper with me.

  Q290  Mr Mudie: But that is the point, if the Governor knew that the various pieces of legislation stopped him acting as a lender of last resort or stopped a rescue of a specific institution, another alternative would be to do what the Fed had done and the ECB had done, and put liquidity into the system. What stopped the Governor doing that or what stopped it happening?

  Sir Callum McCarthy: Could I point out that on the problems that the Governor identified of a legal nature, I think his points were specifically about that preventing a confidential covert lender of last resort.

  Q291  Mr Mudie: Sir Callum, I understand all that, and I had words with the Governor, but it seemed to me the Governor was saying, "I can't do this; I can't do that" and my criticism of the Bank if England is, fine, if we accept all these arguments, what were you suggesting you would do other than just watch the crisis develop? The obvious thing, which was done within a week, is put liquidity into the system, and since he has taken that decision, in fact the last tranche was not taken up such is the confidence of the banks in liquidity. Does that not prove if that decision had been taken earlier you would have been spared this sort of inquisition and the Northern Rock depositors would have been spared all that worry?

  Sir Callum McCarthy: I am not sure if I can say anything other than the point that Hector has made—

  Q292  Mr Mudie: Well, Hector agreed with me! I will settle for that. It is all right, Chairman, he is a good man!

  Mr Sants: I think I said that the market agreed with you and we properly reflected the market's views.

  Mr Mudie: The market is king!

  Q293  Chairman: Following Mr Mudie's point, were you just an interface or did the FSA support the banks in their plea for additional liquidity?

  Sir Callum McCarthy: We made it quite clear to the Bank of England the strength of feeling that was being expressed, but I would say that I believe that that was well-known to the Governor.

  Q294  Chairman: Okay, so let us get a straight answer, Sir Callum, we are looking for one this morning, give us one. Did you support the banks in their plea for more liquidity?

  Sir Callum McCarthy: In terms of the position of the FSA, the responsibility for making decisions on monetary policy (of which this is one) lies with the Bank and it is for them to make—

  Q295  Chairman: Sir Callum, this is getting absurd, it really is, because here we have a situation where some people are saying if you had put extra liquidity in would not have had this run and we would not have had deckchairs outside the 76 Northern Rock branches. We are just asking you in terms of an orderly and efficient market (which is your responsibility) did you support the banks in their plea for more liquidity? Give us a "yes" or give us a "no" or say "we are not going to answer", but make it simple.

  Sir Callum McCarthy: Of those three choices, Chairman, I am afraid I am not going to answer

  Q296  Chairman: That is better, that is fine; it is on the record.

  Sir Callum McCarthy: Because in relation to the conversations that we had within the Tripartite group I think it is proper that they should be conducted in private.

  Chairman: It is dead easy, Sir Callum, if you do answer a question simply. We understand it now. Sally?

  Q297  Ms Keeble: In terms of going forward, to what extent do you think the current problems in the credit market mean that there should be a re-think of the regulation of the credit ratings agencies?

  Mr Sants: I think we should definitely take a look at our credit ratings agency regime. There are a number of different issues around that. There is the perennial one of course of whether or not the credit ratings agencies conflict in the sense that they are being paid by those who they are rating, but of course that issue has been around for some time, and there has been a code of practice put in place by IOSCO which we supported. I think the question obviously that has been raised by more recent events is two-fold: one, to some degree as to how effective are their processes in reaching the conclusions which they reach; and also, just as critically actually, how effective are the institutions in using that information and fully understanding what it is they are being told about. They are being told essentially about a credit rating, of course, not a liquidity rating, and I think there is also a risk to some degree that there has been far too great a reliance placed on credit ratings by institutions and investors as a shorthand way of reaching quick judgments, and that is one of the reasons why the market-place froze up, I think.

  Q298  Ms Keeble: There are a couple of things. You said that the issue about the conflict of interest between the advisory and the risk assessment functions are a problem that has about been around for a while. There have been discussions in the United States obviously about regulation and also in Europe. Given the fact that it has to be done internationally, have you talked with your partners elsewhere about what is happening, and how quickly would it be moved forward so that we are not left then several years down the line with still nothing being done?

  Mr Sants: We certainly have been talking to our partners and I think, as you rightly point out, this is not an issue that could be addressed nationally, not least because these credit ratings agencies are not even based here.

  Q299  Ms Keeble: Could you just detail the discussions that you have had and the timetable for action?

  Mr Sants: We had a discussion last month. There already is a working group within IOSCO, which is the main securities global co-ordinating agency, which had a meeting this month, and we are working on taking forward those issues. They have a code of practice and it was agreed in the IOSCO fora that we would be looking again at that code of practice to see what lessons could be learnt from recent events. There has also been debate here within the CESR context and the European context as well. There will be a number of different strands but we will be looking to take them forward as quickly as possible. International work does not happen as quickly as national work but I agree with you, it should be treated as a matter of urgency.


 
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