Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 320 - 339)

TUESDAY 9 OCTOBER 2007

SIR CALLUM MCCARTHY AND MR HECTOR SANTS

  Q320  Mr Dunne: So I should address that question to either the Treasury, the Chancellor or the Bank of England?

  Sir Callum McCarthy: Could I make it clear that that would be a fair inference if those were the only people who had information and the assumption that any leak must come from one of the Tripartite authorities is an assumption which I do not believe is necessarily true.

  Q321  Mr Dunne: I will have the opportunity to ask Northern Rock themselves next week. If you will indulge me a little bit, Chairman, just turning to the specifics of the regulatory challenge that the Northern Rock situation provided. As we have had the first run on a bank for 150 years and you are the regulators responsible and this has come on your watch, the hard-earned reputation of this country for its financial supervision is essentially at stake at the moment. We have received evidence from the Governor of the Bank of England that following his appearance before this Committee he sought to clarify discussions between the Tripartite Authorities in the run-up to the decision not to extend facilities to Northern Rock whilst they were in the midst of whatever discussions. He confirmed specifically that before 10 September special facilities would not be made available to a purchaser of Northern Rock, and that was based on a discussion which he had with the FSA and with the Chancellor. Can you confirm that those discussions took place and that was a decision that was reached?

  Sir Callum McCarthy: I can confirm both of those.

  Q322  Mr Dunne: What attitude did the FSA take in those discussions as to whether it would be appropriate to provide a facility to a purchaser given that you had the most detailed knowledge of the situation that Northern Rock was in?

  Sir Callum McCarthy: We made clear—and I think I answered this in previous questions—that if a private sector solution was to be pursued, the requirements that we thought would have to be requirements from a potential bidder that would have to be satisfied, so we identified what would have to be done if a private sector solution was to be pursued.

  Q323  Mr Dunne: Was a request made by a potential purchaser of Northern Rock for such a facility before 10 September?

  Mr Sants: Before 10 September, I was just going to elaborate a bit and say I am clear in my mind that we properly discharged our responsibility to bring a private sector solution to the table, and that the only one that was available was the one you correctly describe, which included public sector funding, and I do not believe any subsequent events, including the various discussions that had been going on, suggests there was some other solution out there that could have been reasonably found in the time in question. We brought the only solution on the table, we made clear what was required to deliver it and there was a decision by the Tripartite not to take that suggestion up.

  Q324  Mr Dunne: But what was your recommendation?

  Mr Sants: I think I am back into the answer I gave a little bit earlier. From the narrow perspective of avoiding the set of circumstances with regard to Northern Rock which then transpired, clearly a private sector solution at that point would probably have avoided that outcome; I make that clear.

  Sir Callum McCarthy: Could I also add, because I think it would be incorrect to regard the private sector solution as being a firm, cut and dried offer, it was still at an exploratory stage and there were a number of other issues which would have to be dealt with.

  Mr Sants: If it had been a firm approach it would have had to have been declared to the market, so we should be clear about that point.

  Q325  Mr Dunne: It is clear that it would have been subject to shareholder approvals and regulatory approvals, et cetera, but it might have provided the comfort to those who were both depositors and shareholders in Northern Rock that there was a solution on the table, and even if it was a contingent that might have settled and reassured the markets and avoided a run on the banks. Sir Callum, you said earlier it was the Chancellor who made the decision to extend facilities at the end of that week. Do you accept that had a different decision been made by the Chancellor we would have avoided a run on the bank?

  Sir Callum McCarthy: No, the only different decision by the Chancellor would have been to have not extended facilities.

  Q326  Mr Dunne: No, excuse me, there was the opportunity—we have just discussed it—before 10 September when there was a contingent bid on the table for the facilities that were extended a week later to have been available to the bidder and had that happened there would not have been a run on the bank: question?

  Sir Callum McCarthy: If there had been an offer which had been carried through successfully, by definition, this problem would not have occurred. That must be true.

  Q327  Mr Dunne: But any offerer was not in a position, given the constraints in the credit markets, to be able to take potentially up to £100 billion or so of debt onto its books on an unconditional basis, and therefore operating in the world that we are in with public companies it was inevitably going to be contingent and so you could not have had a completely deliverable bankable proposition, but in terms of providing comfort to the markets that there was a solution in sight, would that not have provided sufficient confidence to depositors and the market alike to have prevented what we are now in which is a calamitous situation where the whole regulatory regime of the United Kingdom is in question? In terms of moral hazard surely that is a more significant issue than allowing the bank to go to the wall?

  Sir Callum McCarthy: I go back to describing the position which is as I have described it and as the Governor set it out in his letter to the Committee.

  Q328  Mr Dunne: I have got two more quick questions. How many banks in other countries have requested similar liquidity facilities from their regulatory authorities with no distress to their depositors?

  Sir Callum McCarthy: I do not know that. I do know that there have been at least two banks which have had serious problems, one of which has resulted in a bail-out and the other an acquisition in the US. There have been significant problems in the Canadian CP market. There have been other problems in France in different aspects of this, so this has been a global problem.

  Q329  Mr Dunne: Are you aware of market rumour that some 150 banks have applied to their regulators around the world for special funding?

  Sir Callum McCarthy: All I would say is that the discussions that I have had repeatedly with regulators in other major countries of the world give me no reason to believe that figure.

  Q330  Mr Dunne: Is it the case that had Northern Rock had a European subsidiary and was active in the markets on Continental Europe, it would have been able to apply to the EU facilities for sufficient funding to deal with its liquidity crisis?

  Sir Callum McCarthy: It could have, I believe, through its Danish branch have done some things; it was a question of the length of time that would take.

  Q331  Mr Dunne: So that is a yes?

  Sir Callum McCarthy: Sorry, I beg your pardon, I am not trying to be difficult.

  Mr Sants: If it had been set up to access the ECB liquidity provision it could have tendered different types of collateral to that which it would have been able to so do in the UK.

  Q332  Mr Dunne: So that is another illustration of the failure of our system, in effect, because had it been a slightly larger organisation, it might have been able to apply to the facilities that existed in Continental Europe?

  Sir Callum McCarthy: If it had had the capability of organising its assets in the right form.

  Q333  Mr Dunne: Looking forward, there is considerable concern in the markets as credit conditions remain tight that another institution might fail. How comfortable is the FSA about the renewal of borrowing facilities for smaller lenders dependent on wholesale funding and how confident is it that we will not see another failure?

  Sir Callum McCarthy: I think the answer that both of us have given to the Chairman in terms of not commenting on individual institutions is one I go back to. I would repeat that, on the whole, the British banking sector is well capitalised and has had the benefit of five years of very good, profitable business.

  Q334  Chairman: Sir Callum, just a couple of questions arising from that. You raised the issue of takeovers and there have been banks in the news allegedly wanting to take over Northern Rock. There are two issues here: the bidding bank receiving support and the terms of that support. Were you in agreement with the banks on the parameters that should have been offered or should be offered on these two issues?

  Sir Callum McCarthy: In terms of the discussions that weekend?

  Mr Sants: I think we are back to the answer, at least from my point of view, that I have already proffered that we made clear what the terms were—and they were indicative terms if I may just say—that would possibly lead to the discussions becoming more serious, and those terms were declined by the Tripartite.

  Q335  Chairman: Let us make it simple: did you agree no support or did you agree the terms of the support? That is really what we are looking for. It is a "yes" answer or a "no" answer or "no answer".

  Sir Callum McCarthy: The Tripartite decision was that it would be wrong to advance assistance to the bidding bank. It was subsequently made clear after the lender of last resort facilities had been made available to Northern Rock that those facilities would remain available to a bidding bank, if there were a bidding bank.

  Q336  Chairman: So you were in agreement with the Bank of England on those two issues regarding the parameters which should be offered, namely the bidding bank receiving support and the terms of that support; you were at one with them?

  Sir Callum McCarthy: We explained what would be required if things were to go forward.

  Q337  Chairman: So you were at one with them, Sir Callum, you were at one with the Bank on that?

  Mr Sants: It was not our decision.

  Q338  Chairman: This is a "no answer" again. This is getting really, really unsatisfactory. You are one of the Tripartite Authorities but what seems to us here, Sir Callum, is that you are crawling into your den and you are not answering anything, and if we want to sort out this issue and this problem for the future we really need to know what one of the eminent authorities thinks, so is that another no answer?

  Sir Callum McCarthy: I am trying very hard, Chairman, to answer your questions as clearly as I can. The FSA does not have a balance sheet which enables us to offer assistance and so what we did, which is what we are required to do, was to try and identify what would be needed, and a decision was taken that it was inappropriate to proceed on that basis.

  Q339  Chairman: The reason why I am asking this, Sir Callum, is very simple, the authorities did not agree to do this and, as a result, the taxpayer is now at risk for £9 billion secured on mortgages which the Bank would never normally accept as adequate collateral, so other than lending to, say, a bank that came in—and from the name of the bank that came in it indicates that they are one of the world's largest and best capitalised banks—the taxpayer has this risk now. If you are interested in orderly markets and seeing them function effectively you should have a view on it, Sir Callum.

  Mr Sants: You could say—


 
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