Examination of Witnesses (Questions 480
TUESDAY 16 OCTOBER 2007
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.
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
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
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
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
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
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
Q489 Chairman: So you had two or
three months' liquidity?
Mr Applegarth: Yes
Q490 Chairman: So there was no problem
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.
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
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
Dr Ridley: I think the sums involved
that have been reported of around £13 billion are approximately
Q496 Peter Viggers: And what conditions
in terms of management were put on the company on that money being
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
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
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