Select Committee on Treasury Minutes of Evidence


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.


5   Ev 294-307 Back


 
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