Examination of Witnesses (Questions 280
TUESDAY 9 OCTOBER 2007
Q280 Mr Simon: That is what the Chairman
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
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
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 problemwe
have discussed thatand 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
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
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
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
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
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
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.