Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 384 - 399)



  Q384  Chairman: Good morning and welcome to our inquiry into Financial Stability and Transparency. Can you introduce yourselves, please, for the shorthand writer.

  Sir Ian Gibson: Ian Gibson, I am a Non-Executive Director and Senior Independent Director at Northern Rock.

  Dr Ridley: Matt Ridley, I am Chairman of Northern Rock.

  Mr Applegarth: Adam Applegarth, I am Chief Executive.

  Sir Derek Wanless: Derek Wanless, Non-Executive Director.

  Q385  Chairman: Good morning to you. Mr Ridley, how were you given the Chairman's job?

  Dr Ridley: The Board chose me as Chairman three years ago. I had been on the Board for 13 years before that and in 2004 they chose me as Chairman.

  Q386  Chairman: What competences and experience did you bring to the job?

  Dr Ridley: I am a businessman and I am on a number of different boards involving a number of different businesses. I had spent at that point ten years on the Board of Northern Rock, including during the transition from a building society to a bank.

  Q387  Chairman: Were you involved in any banking businesses?

  Dr Ridley: Apart from Northern Rock I was not involved in any other banking businesses.

  Q388  Chairman: Are you at ease with the business model that Northern Rock has adopted?

  Dr Ridley: The Northern Rock business model was a good one in that it allowed us to achieve good credit quality on our loan book and steady growth for a number of years. That business model proved unable to cope with an unexpected, unpredicted seizure of the money markets in August.

  Q389  Chairman: Were you aware of the risks to the business at any time? When did you start becoming aware of the risks to the business?

  Dr Ridley: I was fully aware of the risks throughout. We have a Risk Committee and we are continually assessing the risks to the business and stress testing against different risks. We were aware earlier in the year of the risk of tightening in the credit markets and we expected that our good credit quality and our diverse funding platform would stand us in good stead under those circumstances.

  Q390  Chairman: So when were you aware of the risks? What date did you really start discussing the risks to the business?

  Dr Ridley: As I say—

  Q391  Chairman: When did you start discussing the one that got you into this jam?

  Dr Ridley: I started discussing it with the Chief Executive on 10 August, the day after the markets first froze, and during the next few days we discussed it in increasing detail as it became clear that this freezing was less and less and likely to be temporary.

  Chairman: Okay. Michael?

  Q392  Mr Fallon: Dr Ridley, you wrote to Members of Parliament on 24 September saying: "We have no sub-prime loans." Can you explain why this advertisement appeared by Northern Rock saying: "Open for sub-prime business" in the summer?

  Dr Ridley: Yes I can.

  Q393  Mr Fallon: Including an advertisement for "sub-prime products, dedicated sub-prime underwriting and processing teams: call our sub-prime support unit". How can you say that you had no sub-prime loans? Do you know what is going on in your bank?

  Dr Ridley: Yes I do. We introduce sub-prime loans to a third party. We do not hold those sub-prime loans on our balance sheet.

  Q394  Mr Fallon: So the statement "We have no sub-prime loans" can be reconciled with saying "Open for sub-prime business", can it?

  Dr Ridley: Yes it can. We are an introducer of sub-prime loans to a third party and that is what that advertisement is about.

  Q395  Mr Fallon: You make money out of sub-prime loans then?

  Dr Ridley: We have made a small amount of money out of a very small range of sub-prime loans during this year.

  Q396  Mr Fallon: You are playing with words here; I thought you were a journalist. You have a sub-prime business?

  Dr Ridley: I said in my letter that we have no sub-prime loans; it is true—we introduce sub-prime loans to a third party.

  Q397  Mr Fallon: So you are running a sub-prime business?

  Dr Ridley: We have no sub-prime loans on the balance sheet of Northern Rock.

  Q398  Mr Fallon: Mr Applegarth, why was it decided a month after the first profits warning, as late as the end of July, to increase the dividend at the expense of the balance sheet?

  Mr Applegarth: Because we had just completed our Basle II two and a half year process and under that, and in consultation with the FSA, it meant that we had surplus capital and therefore that could be repatriated to shareholders through increasing the dividend.

  Q399  Mr Fallon: Was that not exactly the wrong time to weaken the balance sheet?

  Mr Applegarth: No, what hit us was a liquidity squeeze, not a credit crunch, and really dividends and capital are to do with credit. It was a global liquidity squeeze that hit us.

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