Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 500 - 519)

TUESDAY 16 OCTOBER 2007

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

  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.[3]


  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 out?

  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 funding platform.

  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 more?

  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 process.

  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 Banks—of similar size and facing similar difficulties—just 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 securitisation approaches.

  Q513  Ms Keeble: But you actually had a problem—and I am not sure if this was by volume or by number—in 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 think—and the Chief Executive will correct me—it is about three years at the moment.

  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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