Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 460 - 479)

TUESDAY 16 OCTOBER 2007

DR MATT RIDLEY, MR ADAM APPLEGARTH, SIR IAN GIBSON AND SIR DEREK WANLESS

  Q460  Mr Todd: Right. You have emphasised to us how unpredictable and unpredicted the events have been. Can you explain why you are the only substantial business of this kind that has encountered this difficulty?

  Mr Applegarth: I do not think we are the only business to encounter this difficulty.

  Q461  Mr Todd: Of substance and scale. I recognise there are some smaller operators who have struggled too.

  Mr Applegarth: I think one of the features is the fact that it was a global—

  Q462  Mr Todd: —In the UK and under the governance of the regulatory system here in the UK?

  Mr Applegarth: It has been reported that over 150 banks in Europe were able to access the ECB, and that will of course include bigger UK operators who have franchises across in Europe, so they have been able to access ECB funds.

  Q463  Mr Todd: But that is of course a mechanism of risk management, is it not, that they are able to gain access to other markets? Is that not so? You emphasise the difference between themselves and yourself, but that would of course be a matter of risk which your Board might have considered, the fact that you would not have had the access that was available to some of your competitors; is that right?

  Mr Applegarth: Indeed, and that is why we have worked very hard over the previous decade to try and diversify our funding platform by geography and product. That is why we moved to having four funding platforms—retail cash deposits, covered bonds, securitisation and traditional wholesale—and it is why in each of those markets we look to diversify by geography. So for securitisation for example not only did we tap the UK but we tapped Europe, the Far East and America. If you look at traditional wholesale, we tapped American, European, Asian and Australian markets. Cash deposits, as Sir Derek has already said, we moved across to Ireland and across to Denmark, so we broadened our funding platform to try and increase stability.

  Q464  Mr Todd: Just one last thing, you will know that the Governor when he saw us emphasised the message of moral hazard in taking action to deal with a crisis of this kind. Do you think he has perhaps a moral message for the way in which your bank has been governed, that this is an inappropriate model which should not receive support on a free basis?

  Mr Applegarth: The facility of lender of last resort is there for businesses that are solvent and viable but have a short-term liquidity squeeze, so the lender of last resort is designed for the situation we find ourselves in. Of course what severely hammered us was the retail run that followed the announcement of that.

  Q465  Chairman: Mr Wanless, if I could ask for clarification, 7.5% was Northern Rock's share of the total mortgage lending market at the end of 2006; is that correct?

  Sir Derek Wanless: Our share of the total mortgage market, yes.

  Q466  Chairman: And at the present time it is just under 10%?

  Sir Derek Wanless: The discrepancies are about gross and net and the share of the stock. In terms of net share, we have had 19% in the first half of the net change in the mortgage market.

  Q467  Chairman: Of new mortgage lending.

  Sir Derek Wanless: Of the new mortgage market, which is the gross mortgage market; on how much new lending is done, we had less than 10%.

  Q468  Chairman: That is quite an aggressive approach, is it not?

  Sir Derek Wanless: Less than 10% of the market.

  Q469  Chairman: But 19% of new mortgage lending, that is what you had.

  Sir Derek Wanless: No, we had less than 10% of gross mortgage lending, that is to say new mortgage lending.

  Q470  Chairman: What I am saying to you is 19% of new mortgage lending—

  Sir Derek Wanless: 19% of net which is the difference between the new lending and what is repaid.

  Q471  Chairman: Was that not an aggressive approach?

  Sir Derek Wanless: As I think the Chairman said earlier, the target that we had was an asset growth target, not a market share target.

  Q472  Chairman: The reason I am asking that, Mr Wanless, is I looked up the BBC website before I came and you are the only one with experience of retail banking but it was with NatWest, and what the BBC were saying in their website was that you "were seen as having driven NatWest into an ill-advised series of deals, in particular a foray into the highly competitive US market, and a move to expand its financial market presence." They said during his tenure at NatWest, Wanless made ill-advised forays into investment banking in US markets whilst losing market share. In 1997 a £90 million trading loss was uncovered in NatWest Markets, the bank's investment bank, which many commentators blamed on the investment bank's quality of management. The trader who ran up the £90 million loss had been trading since 2004, which meant that he was overlooked by NatWest's review of its risk control in 2005, but at the time you insisted that things were going well generally. As we know, NatWest was taken over in a hostile takeover by the Royal Bank of Scotland, so I am putting it to you maybe the risk you missed here was the risk that you missed with Northern Rock, and your voice should have been a cautious voice against this aggressive strategy.

  Sir Derek Wanless: The strategy has been a strategy in place since I joined the Northern Rock Board in 2000. It is a strategy which the Board discussed and, as we have said, we discussed the funding aspects of that and indeed the credit control aspects of that on a very regular basis.

  Q473  Chairman: But there was an aggressive strategy?

  Sir Derek Wanless: The strategy was a growth strategy which was communicated to the market so that everyone knew what Northern Rock was seeking to achieve, and it was a strategy where we put in place on the funding side of the business a diverse series of funding sources.

  Q474  John Thurso: Mr Applegarth, listening to you all here today, you sound like frightfully reasonably chaps who have been the ghastly victims of some unforeseeable financial tsunami, yet the plain fact is you are in charge of the only bank that has had a run on it for 150 years. Do you actually accept you have done anything wrong?

  Mr Applegarth: I feel great regret for the anxiety our retail customers have seen. It was a good business model but, clearly, it could not deal with the unforeseen global freezing of the liquid markets.

  Q475  John Thurso: You keep saying it was unforeseen yet this Committee has been discussing it for six months. We discussed it when we were in America. We discussed it in open session. Lots of people were talking about the risks that were coming. Why is nobody else in this crisis? Why are you the only ones?

  Mr Applegarth: I do not think we are the only ones, as evidenced by the number of banks who had to approach the ECB for exactly the same type of borrowing facility—

  Q476  John Thurso: None of them has lost their brand; none of them is up for sale; none of them is, frankly, destroyed by what has happened. You are the only real, serious casualty. Was it a question of the way you were running the bank? Was it a question of the way we regulate? What caused this?

  Mr Applegarth: I think the fundamental cause was the speed and duration and the global nature of the liquidity freeze, heightened for us by the fact that we did not have access to the same type of borrowing facilities that have been available for American banks from the US Reserve and for the European banks from the ECB.

  Q477  John Thurso: So there was nothing you could have done to mitigate this risk?

  Mr Applegarth: No.

  Q478  John Thurso: No action you could have taken that could have mitigated this risk?

  Mr Applegarth: No.

  Q479  John Thurso: Sir Derek, how did you set about in your Risk Committees of 17 April and 17 July examining the future risks? What is the process your Committee had to look at risks that were coming up?

  Sir Derek Wanless: There was not a meeting in April; there was a meeting in July of the Risk Committee.


 
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