Examination of Witnesses (Questions 560
- 579)
TUESDAY 16 OCTOBER 2007
DR MATT
RIDLEY, MR
ADAM APPLEGARTH,
SIR IAN
GIBSON AND
SIR DEREK
WANLESS
Q560 Mr Simon: It only happened in
the UK though, did it not?
Mr Applegarth: No, the global
freezing happened worldwide.
Q561 Mr Simon: No, the retail run
on the bank, your bank.
Mr Applegarth: Absolutely, and
it is a chain of events from—
Q562 Mr Simon: If you cannot tell
us what to do about this, and the FSA cannot tell us and the Bank
cannot tell us, who is going to tell us? What is the answer?
Mr Applegarth: I was trying to
suggest that perhaps one of the issues—and I have to say
that I would like to agree with big chunks of BBA memorandum to
you,[5]
particularly the globalisation aspect, because if each individual
geographic area acts on its own, you will get dislocations in
actions and facilities between different geographic areas. Because
this was a global issue, the Tripartite being judged against a
global issue is somewhat unfair but I think there are major lessons
to be learned in how you tie up each of the different geographic
areas.
Q563 Mr Simon: You think that is
the answer?
Mr Applegarth: For this particular
set of circumstances, it has to be part of the answer.
Q564 Mr Simon: Who is going to do
this tying up?
Mr Applegarth: Really, that is
a matter for the authorities, is it not? I would imagine it would
be led by the Treasury and the Bank of England.
Q565 Mr Simon: The Treasury and the
Bank? Not the FSA?
Mr Applegarth: I do not think
I know enough to comment as to who should be the right person.
Q566 Mr Simon: Somebody must know
something about this. You said, Dr Ridley, that you are quite
clear that the FSA was the regulator, although you would never
know that to talk to the FSA. You said you were quite clear that
it was them you were talking to mainly, because they are the supervisory
body. The next group that you spoke to was the Bank, and last,
and presumably least, the Treasury. Do you think this might have
been avoided if it had been the other way round, if, instead of
a Tripartite arrangement where nobody was responsible for anything,
the Treasury was responsible for dealing with you, sorting out
the liquidity early and making sure that this did not happen?
Dr Ridley: I think that is a hypothetical
question and—
Q567 Mr Simon: Clearly it is a hypothetical
question. You are a scientist. There is no other way to seek to
make sure that this does not happen again, is there?
Dr Ridley: No, there is. As Adam
has suggested, the British Bankers Association has made suggestions
which we think are sensible for looking at these issues and for
learning lessons from them. There is a division of responsibility
between managing liquidity in the markets between the Bank and
supervising individual institutions in the FSA. As far as we were
concerned, there was not a problem of communicating our position
between those two institutions. We were able to communicate to
both.
Q568 Mr Dunne: I would like to pursue
some of the line of questioning of Mr Simon as to what could have
been done in the specific circumstances to have prevented the
run on the bank in the case of Northern Rock. If we can start
by the relationship between the Bank and the FSA and reporting
the liquidity constraints, can you tell us when you first identified
to the FSA a specific liquidity problem emerging for Northern
Rock?
Dr Ridley: I will let Adam answer
that because he had the first contact with them.
Mr Applegarth: Yes, of course.
We first noticed dislocation in the market on 9 August and we
waited one working day before contacting the regulator, so that
would be 13 August. From then it was a very close relationship,
including two formal calls a day to update them on the position.
Q569 Mr Dunne: So neither the Risk
Committee, chaired by Sir Derek, nor the Board, nor the operations
of your own internal treasury had noticed any tightening in market
conditions between April and 9 August?
Mr Applegarth: No, I am not saying
that. We certainly noticed the tightening of conditions and that
is why we announced to the market publicly a change in strategy
for lower growth and removing assets from the balance sheet. What
we did not have any foresight of is the closure of the markets.
We have managed and lived through various closures. The chairman
has already mentioned we were doing a securitisation issue in
the middle of 9/11. I remember going back to the Asian banking
crisis, but this is the first time that you had seen a very rapid
and very widespread, both in terms of geography and in terms of
product, closure of the market. So yes, of course we noticed the
fact and we reacted to it. What we had not foreseen is the complete
closure of liquid markets on such a wide basis, whether it is
commercial paper, asset-backed commercial paper, securitisation,
covered bond, medium-term note and even the cash deposit markets
in the UK and US effectively closed.
Q570 Mr Dunne: At what point did
you first discuss with the FSA or the Bank of England the opportunity
to tap the lender of last resort facility?
Mr Applegarth: We first contacted
the FSA on 13 August, and then—
Q571 Mr Dunne: To discuss that issue?
Mr Applegarth: No, to discuss
the issue of liquidity, and then I have to say we did a vast range
of things to try and get liquidity, whether it was raising it
in different markets, because at that point you could not tell
that the markets were completely closed. You actually did see
two small covered bond issues get away in August before that market
closed. On 9 August you could not foretell the extent and depth
of the closure. In terms of the facility of lender of last resort,
once we tried to raise liquidity, once we had tried to repo assets,
once we had gone down the route of trying to find a safe haven
for the company, because we started that on 16 August—
Q572 Mr Dunne: Stop there then. At
what point did you start seeking an acquirer for the business?
Mr Applegarth: 16 August.
Q573 Mr Dunne: Those discussions
ran in parallel with all of these other events?
Mr Applegarth: We were trying
to do all things at the same time, yes.
Q574 Mr Dunne: You have not given
me a date yet when you discussed the lender of last resort facility.
Could you do that, and could you tell me whether or not a third
party approached the Bank of England to secure a similar facility?
Mr Applegarth: Yes, we had been
talking with the Bank of England from the middle of August in
terms of what if, what would be a backstop facility, so we were
talking, as you would expect, because it is a prudent thing to
do to put a backstop facility in place in case of all the other
actions in place. That would have been the middle of August.
Dr Ridley: Can I just interject
there? In my first conversation with the Governor of the Bank
of England on 16 August the lender of last resort was mentioned
as a theoretical possibility at that stage.
Q575 Mr Dunne: What was the response
of the Bank of England at that stage?
Dr Ridley: It was mentioned by
him.
Q576 Mr Dunne: That that was an opportunity
which they might make available?
Dr Ridley: If we got to the point
where liquidity continued to be a problem and the markets remained
closed, then of course that was available and would need to be
discussed.
Mr Applegarth: But as a last resort,
so their encouragement to us was the work we were doing to try
and find liquidity or find a solution. It was lender of last resort.
It had to be a last resort.
Q577 Mr Dunne: What I am trying to
get to is that the decision to provide that facility was taken
after it was too late, after you had had a run on the bank. Why
was that decision not confronted before the run on the bank, either
by yourselves or a third party?
Mr Applegarth: It was actually
taken before the run on the bank. It was the announcement of the
facility being leaked that actually was the start of the run.
The run effectively started on 14 September. Our corporate activity
ceased on 10 September and therefore between the 10th and the
leak late on the 13th, that was when we were putting in place
the lender of last resort. We had intended to announce that on
the following Monday but clearly, the leak meant we had to rapidly
accelerate and therefore our communication plans had to be rapidly
accelerated and they were not as smooth as they would have been
had there been a Monday announcement.
Q578 Mr Dunne: Had a third-party
acquirer been granted the facility, in your opinion, would that
have prevented the run on the bank?
Mr Applegarth: Had a facility
been granted, I am led to believe that we would have had a bid
to consider and I suspect that, had an offer been made with a
big retail brand, then the run would not have taken place, yes.
Q579 Mr Dunne: So with hindsight,
you would be recommending that the Bank of England consider relaxing
its arrangements; the moral hazard argument that prevented that
decision from being taken would have stopped the run on the bank.
Mr Applegarth: I have a little
difficulty understanding the moral hazard argument. All I know
is from Northern Rock's point of view, and avoiding the shock
and the huge distress of a retail run, it would not have taken
place, in my view, for what it is worth, if we had been able to
announce an offer with a big retail brand.
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