Examination of Witnesses (Questions 320
TUESDAY 9 OCTOBER 2007
Q320 Mr Dunne: So I should address
that question to either the Treasury, the Chancellor or the Bank
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
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 clearand
I think I answered this in previous questionsthat 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
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
Q326 Mr Dunne: No, excuse me, there
was the opportunitywe have just discussed itbefore
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
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
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
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 wereand they
were indicative terms if I may just saythat 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 inand from the name of the bank
that came in it indicates that they are one of the world's largest
and best capitalised banksthe 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