Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 480 - 499)

TUESDAY 16 OCTOBER 2007

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

  Q480  John Thurso: There was no meeting in April? According to the letter we had from the FSA there was a meeting on 17 April, but they have obviously got it wrong.[1]

  Sir Derek Wanless: There was no meeting of the Risk Committee then. It may be they are referring—

  Q481  John Thurso: There was one in July?

  Sir Derek Wanless: It may be they are referring to meetings of the Asset and Liability Committee, which is an executive committee which meets monthly in Northern Rock.

  Q482  John Thurso: I am sorry, I have got letter here from the FA and in it they said under the heading "Risk Committee" that the Committee met on the following dates in 2006 and 2007. I will not quote the 2006 dates but 13 February, 17 April and 17 July are the quoted dates for the Risk Committee meetings in 2007, so they got that wrong?

  Sir Derek Wanless: Yes, and we can confirm to you if you wish the precise dates of the meetings.

  Q483  John Thurso: Your meeting was in July.

  Sir Derek Wanless: We met in July.

  Q484  John Thurso: What discussions did you have?

  Sir Derek Wanless: At that meeting in July we talked about, sorry in June, we met in June. You gave me two months and neither of them was right. We met at the end of June and we discussed the quality of the credit portfolio, we discussed the Treasury position and we discussed operational risk. We took a report from the head of risk management in the company, as we always did, about the activity he had underway and particularly about the ICAAP activity, which was the main focus of his activity at the time.

  Q485  John Thurso: Did you discuss liquidity and the way in which you would be refinancing at all? Was that seen as a risk at that time?

  Sir Derek Wanless: Treasury management was there and discussed it at each of the meetings. Not long before that meeting we had had our second Granite transaction of this year, which was heavily oversubscribed. Although the Committee this morning is talking a lot about what happened after March, in fact in May this year we had a Granite issue of over £4 billion, which was heavily oversubscribed, so there was no indication that our paper, which we regarded as high quality (which is why the Risk Committee paid such attention to credit risk) was damaged by what was happening.

  Q486  Peter Viggers: What would your advice be for other institutions in the light of the experience you have gone through in liquidity and how they should assess risk?

  Sir Derek Wanless: Clearly, as with every other aspect of risk, you take everything that has happened in the world that you can look at looking backwards, and it is much easier with hindsight, but I suspect the way other organisations will look at their risk management in respect of liquidity will depend very much on how the authorities react to what has happened, and what happens, both on a global and a UK basis, in terms of the way the authorities are going to handle liquidity in future.

  Q487  John Thurso: Do you think that the regulations should be amended to have tighter liquidity rules?

  Sir Derek Wanless: I think the BBA has sent to this Committee its thoughts about the matter, because clearly there is a great deal of work to be done to work out how a sub-prime crisis in the US became a run on a bank in the UK, and the whole chain of events, and what could have been done by whom at which stage in that chain of events is something that the authorities are clearly giving a great deal of attention to.

  Q488  Chairman: If I could add on to John's question, the Annual Report for 2006 at page 51 talks about the liquidity risk question. It says here clearly that the FSA liquidity rules require the group to be able to meet its sterling obligations without recourse to the wholesale money markets for period of at least five business days. On 9 August how many days' liquidity did you hold?

  Mr Applegarth: We were still funding from 9 August until 14 September but the duration came down, so based on the levels of funding we had, we still had two or three months' worth of funding. The reason we went to the Bank of England for a facility was as a backstop facility. We had not intended to draw down but of course we had to in the light of the retail run.

  Q489  Chairman: So you had two or three months' liquidity?

  Mr Applegarth: Yes—

  Q490  Chairman: So there was no problem then?

  Mr Applegarth: The problem we had was you could not tell how long the markets were going to be closed and it was a reasonable and proper thing to do to put a backstop facility in place.

  Q491  Chairman: Had that increased or decreased since the start of the year?

  Mr Applegarth: It had actually increased since the half year because we increased our liquidity by £2.3 billion at the half year stage.

  Q492  Chairman: I would like a note on that please.

  Mr Applegarth: Of course.[2]


  Q493  Peter Viggers: Who is currently running Northern Rock?

  Dr Ridley: The Board is running Northern Rock and Adam and his executive team are managing the operations.

  Q494  Peter Viggers: And how much public money has been advanced to Northern Rock?

  Dr Ridley: The borrowings have been reported in the press and the sums involved—

  Q495  Peter Viggers: Perhaps you would tell us.

  Dr Ridley: I think the sums involved that have been reported of around £13 billion are approximately correct.

  Q496  Peter Viggers: And what conditions in terms of management were put on the company on that money being advanced?

  Dr Ridley: In terms of who was to be in charge of the company and so on?

  Q497  Peter Viggers: Exactly?

  Dr Ridley: No particular conditions.

  Q498  Peter Viggers: So this amount of public money was advanced to the people who had put the bank in this position without any management controls being put on you at all?

  Dr Ridley: The authorities recognised that it is for the Board, and through the Board responsibility to its shareholders, to run its own business.

  Sir Ian Gibson: Could I comment there, Chairman. The FSA in particular but also the Bank are at present involved, as you would expect, in a considerably closer relationship with all the executives of the bank and they have been visitors to and demanders of information from the bank in considerable detail since before the issue of the facility and right through including today, and therefore whilst the management of the bank remains with the executive and the supervision of the executive with the Board, we would not suggest that the authorities are not involved in considerable detail in overseeing what we do.

  Q499  Peter Viggers: Drawing on my own ministerial experience, in a similar situation we bound the company in question hand and foot so that the management could not take executive decisions without our authority. Has something like that happened to Northern Rock?

  Dr Ridley: We are certainly, as Sir Ian said, in close consultation on every decision of significance with the authorities, yes. It would be foolish not to be.


1   Note by John Thurso: The information provided by the FSA in fact related to the dates of the meetings of the FSA's own Risk Committee. Back

2   Ev 231 Back


 
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