Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 340 - 359)

TUESDAY 9 OCTOBER 2007

SIR CALLUM MCCARTHY AND MR HECTOR SANTS

  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 quickly.

  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 significant—and I am not talking about the very big banks, of course they are—number 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 that point?

  Sir Callum McCarthy: Absolutely not.

  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 future—and I can see Mr Sants nodding—in 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 remark.

  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. Andrew?

  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 meetings please?

  Sir Callum McCarthy: If you would like me to I will certainly, sir.[5]

  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; correct?

  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 into—and there has been an announcement this morning in relation to that—wish 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 had.


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