Examination of Witnesses (Questions 340
TUESDAY 9 OCTOBER 2007
Q340 Chairman: If you are not going
to answer the question tell us and then it is on the record.
Sir Callum McCarthy: I do not
think I have anything else to say.
Chairman: So you are not going to answer
the question. Okay, you are not going to answer it. There are
three or four people who want to finish up on the Northern Rock
thing before we go on to others, so Colin, Mark, George and Michael
Q341 Mr Breed: We have got the problems
of liquidity and all that sort of thing and hopefully for the
next few months that might calm down. However, is there not a
real further problem on the horizon that if the pricing of risk
becomes stricter, if we have more write-offs, if we have lower
profits, as seems likely, then capital adequacy rules are going
to be under real pressure, and we are going to find ourselves
in a few months' time with many lending institutions finding themselves
up against capital adequacy rules, which is going to produce another
potential crisis all the way through?
Sir Callum McCarthy: We have clearly
been much concerned to look forward as to how this will unwind.
We have been particularly concerned, as have our counterparts
in other countries, to look at the effect of bringing back on
balance sheet the assets which are at the moment in conduits and
special investment vehicles. I have no doubt that there will be
pressure on capital, but equally I go back to the fact that these
banks are well capitalised and that they have the benefit of
Q342 Mr Breed: They are well-capitalised
under existing rules and existing risk profiles. Once you apply
those stricter risk profiles, once they have lower potential profitability,
once we have higher write-offs, all of which will affect the capital
base as well as bringing in the new rules next year, are we not
going to find that a significantand I am not talking about
the very big banks, of course they arenumber of potential
lending institutions, and I am not going to put it much higher
than that, are going to find themselves up against capital adequacy
rules which they will not be able to meet and they will not be
able to find the capital to continue?
Sir Callum McCarthy: I do not
believe that that is the central case at all.
Q343 Mr Todd: You can correct me,
Sir Callum, but I recall you described the behaviour of he people
in the queues to take out their money from Northern Rock as being
"irrational". I think that is right.
Sir Callum McCarthy: Could I correct
you, if I may, because I have huge sympathy with the anxieties
of the people who queued on that Friday, Saturday (and would have
queued on Sunday) and queued on Monday. The comment that I made
was made only after the Chancellor had given his guarantee and
at that point the situation absolutely changed. As from 5 o'clock,
or whatever the time was, on 17 September there was no purpose
in anybody queuing because there had been a clear and absolutely
unequivocal guarantee given by the Chancellor. That changed the
event and I did say that there was no rational cause for anybody
after that statement to queue.
Q344 Mr Todd: And I think we all
agree with that but you made no comment on their behaviour before
Sir Callum McCarthy: Absolutely
Q345 Mr Todd: Fine. One of the things
that certainly struck me out of this whole exercise was that however
we discussed this issue, the reaction of the consumer was not
properly predicted or understood, and that the signals given by
actions taken by the Bank and yourselves were not properly understood
always by the consumer who had their money invested in Northern
Rock. Do you think there is some work to be done in the futureand
I can see Mr Sants noddingin trying to understand better
both the information that consumers require to properly appraise
the risk of what they are doing and also what the consumer understands
the responsibilities to be of various people who regulate the
institutions in which they place their money?
Sir Callum McCarthy: I agree entirely
with that line of argument. I would make one point that one of
the things that was particularly difficult in relation to Northern
Rock was the sheer logistics. It had 72 branches which normally
were very small, perhaps with a couple of counters, you had offices
where if you got as many as ten customers arrive there was a queue
outside. You had a problem about the band width of their Internet
banking. Everybody who actually got to the front of the queue
got paid off at 100 pence in the pound and everybody who got through
on the Internet got their money out. I think the logistics were
a problem but much more widely than the logistics was a general
problem of first of all the fact that the compensation scheme
only gave you 100% up to the first £2,000 and also the need
for a facility which produces rapid pay-offs rather than people
having to wait for an extended period. I think all those are questions
that we have to address and if we address them I think people
should have greater confidence in comparable events.
Mr Sants: I would just add, because
you noticed me nodding, we have a role in consumer confidence,
we have a role here to communicate with your constituents, with
the customers, and clearly I think the messaging was not very
effective. Our phrases along the lines of "this bank is solvent"
and "lender of last resort", this type of terminology
Q346 Mr Todd: Were not understood?
Mr Sants: It is a technical terminology
and there is a challenge here for us to connect properly with
the consumers and there is a consumer confidence issue that goes
into the communication.
Q347 Mr Todd: Can I just interrupt
and say one of the reasons why other banks have chosen not to
take up the offerings of the Bank of England's rather penal liquidity
is partly because they quite readily understand the signal that
might possibly give to their customers of doing such a thing,
so I think what is required is a better understanding of the mechanics
of decision-making that consumers take in these sorts of matters,
is it not?
Mr Sants: Absolutely.
Mr Todd: Good, okay, that is fine.
Q348 Peter Viggers: Is your supervision
of banks, exercised jointly with the Treasury and the Bank of
England, weakened by the ability of banks to have access to the
European Central Bank or other external financial facilities?
Sir Callum McCarthy: No, I do
not believe that our supervision is in any way weakened by that.
It is important that we should understand whether any particular
institution does have access because it affects the liquidity
available to them.
Q349 Mr Simon: Sir Callum, I have
revised my view, you are not the Herol "Bomber" Graham
of the financial world; you are the Sugar Ray Leonard of the financial
services sector; a world-class ducker and diver, bobber and weaver,
but let me try one last straight left, if I may. You said that
if the person who briefed the FT against the Bank that
day turned out to be from the FSA you would sack them. Given how
glib and dismissive you have been about this before this Committee
today, if that person can be shown to have been from the FSA will
you not only sack them but sack Mr Sants and resign yourself?
Sir Callum McCarthy: First of
all, can I make clear that I do not believe that I have been glib.
If I have been glib I apologise to all this Committee. I have
tried very hard to deal with very serious issues as seriously
as I can, so can I just put that on the record.
Mr Simon: From what the Chairman has
said and I have said that it is very obvious to all of us that
this briefing against the Bank has clearly happened and it has
clearly come from the FSA, you have just said "Not true,
I don't believe a word of it. It simply is not the case. Unless
you can prove it I am not having anything to do with it."
If that is not glib, what is it?
Q350 Chairman: I am writing to the
FSA and that will be public information.
Sir Callum McCarthy: Can I just
be clear, Chairman, that I have said that if I found that any
member of the FSA had briefed against the Bank I would fire them,
and I do not regard that as a glib remark nor an irresponsible
Q351 Mr Simon: The question was whether
you would resign yourself having been so glib about it today.
Sir Callum McCarthy: I am sorry,
I have repeatedly said I do not regard myself as having been glib.
Chairman: I got the feeling that you
want you can come along here resigning, Sir Callum, we have still
got an inquiry to be getting on with, so do not worry about that.
Q352 Mr Love: I am still trying to
search out the essence of the Memorandum of Understanding between
the three different organisations. We have pressed on is there
a leadership role for one of them in certain circumstances and
that does not seem to apply. We have also been pressing on who
takes responsibility and it would appear that what happens is
each of the three organisations runs away from things that are
not its responsibility. You have said quite clearly in response
to all the questions that that is the responsibility of the Governor
of the Bank of England. Is there a role for collective responsibility
and would the Memorandum of Understanding work better if there
was some collective spirit amongst the three organisations?
Sir Callum McCarthy: If I look
at what we have been trying to do since these problems generally
developed in August, and in relation to this period of Northern
Rock, I think there has been very close and collective work. That
is point one. Point two: the point I have made repeatedly is that
there are certain decisions which are not decisions for the FSA
but are decisions for the Bank of England where we have the responsibility
to give information, and I believe that we have done that, and
where we may express views to the Bank, but those views, I am
afraid, I am going to keep private, and that is I think the position
that I have, I hope, explained repeatedly.
Q353 Mr Fallon: Sir Callum, you have
implied this morning that you have discharged your responsibilities
throughout properly with a rather feeble caveat where I think
you said you should have been "more forceful a little earlier".
Can I put it to you that you have been responsible for supervising
a bank whose business model you yourself described as "extreme"
that then became completely illiquid, was then subject to the
first run on a bank for 150 years, has now in effect been nationalised,
with all the damage to the British banking system that results
from that. Is it not the case that the FSA has fundamentally failed
in its supervisory duty?
Sir Callum McCarthy: No I do not
think we have fundamentally failed in our supervisory duty. I
think we have discharged our duties in particular ways and I think,
as both Hector and I have repeatedly made clear, that there are
absolutely things that we have to do differently and better than
we have done.
Q354 Mr Fallon: So you do not accept
responsibility for this fiasco?
Sir Callum McCarthy: I am sorry,
I accept responsibility in the terms in which I have set it out
because I think there are things which the FSA had responsibility
for which, as we have both made clear, were not done well enough.
Q355 Chairman: Sir Callum, I looked
at the FSA Annual Report which you have given us and in table
5.2 on page 56 is a list of those attending the Risk Committee.
Everyone has full or perfect attendance on that Risk Committee
other than Sir John Gieve, who attended only two out of four of
the Risk Committee meetings. In your correspondence to us will
you indicate exactly what dates Sir John missed those Risk Committee
Sir Callum McCarthy: If you would
like me to I will certainly, sir.
Q356 Chairman: Thank you. The FSA
handbook incorporates the concept of approved persons, including
executive and non-executive directors; am I correct?
Sir Callum McCarthy: Yes.
Q357 Chairman: In assessing fitness
and propriety the FSA has regard to competence and capability;
Sir Callum McCarthy: Yes.
Q358 Chairman: So do you regard the
Northern Rock Board as competent and capable and do you still
regard them as that given that all these members are still at
the driving wheel?
Sir Callum McCarthy: As you say,
we authorised, as we authorise non-executives and executives of
major banks, all those people. We took a view on the overall corporate
governance, and I would point out that for example the Risk Committee
or the Liabilities and Assets Committee of Northern Rock was actually
chaired by an extremely experienced banker. We looked at all that.
We will of course, whatever the shape that Northern Rock evolves
intoand there has been an announcement this morning in
relation to thatwish to look at the continued authorisation
that we have granted, as we do with all people.
Q359 Chairman: Okay, if I could just
ask you that again: do you regard all the Board on Northern Rock
at the moment as competent and capable?
Sir Callum McCarthy: We believe
that they were properly authorised under the processes that we
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