Examination of Witnesses (Questions 500
TUESDAY 16 OCTOBER 2007
Q500 Peter Viggers: Has a formal
structure been put in hand which would prevent you from taking
certain executive decisions without the FSA's authority?
Dr Ridley: I would not say a formal
structure has, but there are regular and formal links which enable
the authorities to consult with us and us with them on every decision.
Peter Viggers: Would it be in order,
Chairman, to ask for a note on this in due course?
Chairman: Yes of course.
Q501 Peter Viggers: One specific
question: Countrywide, a US mortgage bank, relied in a similar
fashion to Northern Rock on short-term funding but chose to take
out insurance against liquidity drying up. Is liquidity insurance
available here? Did you consider it and why did you not take it
Mr Applegarth: I think the first
thing to say is that our funding platform is broader than Countrywide's
in that we have the four funding vehicles. We did have some insurance
in place but clearly it was inadequate to cope with the retail
run. It was not the same volume of insurance as Countrywide had
put in place but we did have swing-line and standby facilities
put in place. They were smaller because we have a more diverse
Q502 Chairman: Just to add on to
the question from Peter, you say you have £13 billion presently
from the Bank of England?
Dr Ridley: Correct.
Q503 Chairman: Do you have an idea
of the maximum amount you may need to borrow in the future?
Dr Ridley: I do not think that
is a number that we would publicly wish to divulge. It depends
enormously on how things turn out and on different scenarios.
Q504 Chairman: Do you think you will
have to go back to the Bank of England?
Dr Ridley: We are talking continuously
to the Bank of England.
Q505 Chairman: But my question is
do you think you will have to go back to the Bank of England for
Dr Ridley: We put in place a second
facility about a week ago, as was announced by them and by us,
which gives us the opportunity to draw down on that until February.
Q506 Chairman: So you could be going
back to the Bank of England for more?
Dr Ridley: As I say, it is a continuous
Q507 Chairman: But you could be going
back to the Bank of England for more?
Dr Ridley: Yes.
Q508 Chairman: That is fine. The
point about Countrywide that Peter made, it was the Governor of
the Bank of England who made that speech in Belfast last week.
He is very clear here when he says "It is a Tale of Two Banksof
similar size and facing similar difficultiesjust a few
weeks apart. On 17 August Countrywide was able to claim on that
insurance and draw down $11.5 billion of committed credit lines.
Northern Rock had not taken out anything like that level of liquidity
insurance". So that was really a failure on your part? You
got yourself into a situation which Countrywide did not get themselves
into; is that correct, Dr Ridley?
Dr Ridley: As the Chief Executive
said, we took steps to ensure that we would not need so much insurance
by diversifying our funding platforms more than Countrywide.
Q509 Chairman: But Countrywide did
not get themselves into this situation; you got yourselves in
this situation; there is a lesson there for you, surely?
Dr Ridley: Yes.
Chairman: So you failed. Sally?
Q510 Ms Keeble: I wanted to ask some
more about the liquidity and the wholesale borrowing. Dr Ridley,
you said that your borrowing on the wholesale market was long
term. What was the profile of your borrowing exactly?
Dr Ridley: The covered bonds have
an average life of something like seven or eight years.
Q511 Ms Keeble: And what percentage
did you have of that?
Dr Ridley: They were about 7%
or 8% of the funding. Securitised bonds, which is what we call
the Granite programme, had an average maturity of about three
and a half years. That is about 46% of our borrowing. The rest
of the wholesale borrowing was in the medium-term markets. Its
maturity profile was fairly long by the standards of most banks,
ie mostly 90 days plus.
Q512 Ms Keeble: Exactly, it was three
months plus. You obviously were able to fulfil the requirements
on liquidity of 5% in five days, and you had two to three months,
Adam Applegarth said, but after that you had a very large amount
of loans falling due, did you not? Your profile looks like that?
Dr Ridley: We had a high level
of wholesale maturities in August. That was because we were expecting
to do a securitisation in early September which would have brought
in £3 or £4 billion worth of liquidity, so inevitably
you tend to slightly run down your other wholesale book as the
Q513 Ms Keeble: But you actually
had a problemand I am not sure if this was by volume or
by numberin that just over 50% was between three and seven
years, so the other 50% of your exposure in the wholesale markets
was very much shorter?
Dr Ridley: I think that 50% refers
to the proportion of the balance sheet and of course there is
a large retail deposit book in there which technically is short-term
funding, as we saw during the run.
Q514 Ms Keeble: But your exposure
to the wholesale markets was 75%, was it not, and about half of
that was three and a half to seven years, you are saying, and
half of that was longer and it was just over the three months;
is that not right?
Dr Ridley: Rather more than half
of that was in securitisation and covered bonds.
Q515 Ms Keeble: You said earlier
that your borrowing on the wholesale markets was longer than your
lending, but most mortgages must be longer term than three and
a half years or three to six months?
Dr Ridley: One of the features
of the mortgage market recently has been that people re-mortgage
fairly often and this means that the average length of time that
a mortgage stays on our balance sheet and on most banks' balance
sheets has recently come down and I thinkand the Chief
Executive will correct meit is about three years at the
Mr Applegarth: The average life
of a mortgage product is three years.
Q516 Ms Keeble: And what number are
actually three years?
Mr Applegarth: That is the average
life of our mortgage book. You will have something like 60% in
our two-year fixes and the rest are obviously longer than three
years, they tend to be five-year fixes. The average life of our
funding was about three and a half years. As the Chairman said,
of our funding, 50% was securitisation, which had an average life
of three and a half years; 10% was covered bonds, which had an
average life of about seven years; and of our wholesale borrowings,
which is 25%, half of that had a duration longer than one year
and the other half was less than one year's duration.
Q517 Ms Keeble: I agree that the
profile of some of your wholesale borrowing is similar to some
other banks and building societies, but the difference is that
your exposure was greater because it was 75% so it actually looks
that you were not borrowing long and lending short; you were actually
borrowing short and lending long.
Mr Applegarth: I would not agree
with that. The average life of a mortgage product is three years
and one month and the average life of our funding was three and
a half years.
Q518 Ms Keeble: But you had half
of your borrowing falling due round within round about three to
six months, did you not?
Mr Applegarth: We had 10% of our
borrowings which had a maturity of less than one year; we had
10% of our borrowings that were over one year; we had 50% of our
borrowings that were three and a half years; and we had 10% of
our borrowings with an average life of seven years.
Q519 Ms Keeble: And what were the
different interest rates involved?
Mr Applegarth: The average rate
on securitisation for the stock was about LIBOR plus ten basis
points; the average price for covered bonds, which is the seven
year, was about LIBOR plus one basis point; the average price
of longer term wholesale was about LIBOR plus five; the average
rate for shorter, ie less than year, was about LIBOR flat.
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