Examination of Witnesses (Questions 580
TUESDAY 16 OCTOBER 2007
Q580 Mr Dunne: Can we just touch
on the leak for a moment? Where do you believe the leak came from?
Mr Applegarth: That is a hugely
difficult question because I cannot answer it. All I know is we
had not even signed the facility when the leak took place. My
treasurer was going down with the company secretary to go through
the negotiations through the night of the 13th. The facility was
actually only signed late in the night of the 13th or early in
the morning on the 14th, and yet the leak took place on the evening
of the 13th, so it caused immense difficulties.
Q581 Mr Dunne: Do you believe it
is likely to have come from the people in the know within the
bank or its advisers?
Mr Applegarth: All I know is it
did not come from us.
Q582 Mr Dunne: Or your advisers?
Mr Applegarth: Or our advisers.
It is massively not in our interest.
Q583 Mr Dunne: Is there any evidence
of any other information that you supplied to either your regulator
or to the Bank of England getting into the public domain?
Mr Applegarth: Yes, there have
been things appearing in the public domain that have been provided
to third parties but I cannot say where the leak was because,
as you can imagine, there are a huge number of advisers on both
sides. I am not just talking about PR advice; I am talking about
banking advisers, accountants, lawyers. It is impossible to tell
where they have come from. All I know is that there have been
three leaks that have been massively damaging to the business
and it has not been in our interests to leak them. So I am confident
it has not come from us.
Q584 Mr Dunne: Had the facility existed,
as we have discussed earlier, in the US or the Continent to have
covert funding lines available to you, would we have avoided the
run on the bank?
Mr Applegarth: I think if we had
been able to borrow on the lines that we did, which is basically
using our mortgage and our mortgage assets as collateral, which
is what they do across inI will just take the ECB as an
example. The ECB has had over 150 institutions borrow on a similar
line and, because it is not public, then clearly you have not
had the shocking retail run that we have had to experience. So
I suspect the answer is yes.
Q585 Mr Dunne: You had no mechanism
available to you because you were not regulated by the ECB to
be able to approach them yourselves as an alternative?
Mr Applegarth: No. We have a branch
across in Ireland and had we had more time, we might have been
able to put in place the legal documentation and provide the collateral
through the Irish branch. The trouble is that would have taken
two or three months and in trying to put the backstop facility
in from the Bank of England, we were trying to put a sensible
and prudent backstop in place that we thought we might not have
to draw down on because we were actually still fundingnot
fully funding, and duration was noticeably shorter but we were
still funding until 13 September, but I think it would have been
a gamble to have relied on getting documentation and collateral
in place through the Irish branch. Had we done that a year ago,
then we would have been able to do that, but we had not.
Q586 Jim Cousins: I wonder if I could
just ask you, Dr Ridley, before the matter was raised with the
Bank and the FSA on 13 August, that is to say, the sustainability
of your situation, did the Bank or the FSA ever approach you with
questions about the sustainability of your situation?
Dr Ridley: Not in relation to
a particular change of liquidity. The FSA was in continuous contact
with us, as we have made clear, throughout the Basle II process
and we were talking about risk and stress-testing throughout the
process, so there was a two-way dialogue but no, we did not take
a particular course saying "Markets are getting particularly
difficult, we think liquidity is going to dry up" or anything
like that, if that is what you are referring to.
Q587 Jim Cousins: So the first doubt
about the sustainability of your situation came from you to them?
Dr Ridley: Correct.
Q588 Jim Cousins: The Chancellor,
in his statement on the 11 October, Mr Applegarth, said "We"and
by that I think he meant not just the Treasury but the FSA, the
Bank and Treasury together"did everything that we
could to try and resolve the situation without special support
becoming necessary." In your answer that you have just given
to one of my colleagues it is plain that you take the view that
there were other things that could have been done that might have
avoided special support becoming necessary.
Mr Applegarth: I think it is undoubtedly
true that in the period from 9 August to 14 September we went
through a wide programme of attempts to get liquidity, whether
it was by raising liquidity, repo-ing, but additionally, before
we went to the Bank as a lender of last resort, we did start on
16 August corporate activity. It is my view that, had the facility
had been granted to a major high street retail bank ahead of us
having to get the facility, that would have stopped a retail run,
but that is my view.
Q589 Jim Cousins: I would now like
to ask you, Dr Ridley and Mr Applegarth, about the guarantee to
depositors, which of course was given by the Treasury, and subsequently
of course extended to new deposits that had been created. What
was asked from you in return for this guarantee to depositors?
Dr Ridley: I do not quite follow
Q590 Jim Cousins: The question is
a very clear one. A depositor guarantee was given by the Government
to existing depositors and subsequently it was extended to new
deposits. What was asked of you in exchange for that guarantee?
Mr Applegarth: The first guarantee
was for existing customers and that was later clarified to include
customers returning to their account. That was important to us,
because that allowed us to refund penalties to the customers,
and that facility is still available until the end of October
to make sure that customers who paid a penalty have not been disadvantaged.
For new customers, in order for us not to be advantaged versus
our competitors, we have to pay a fee for each new deposit coming
to us to make sure that we are not at a commercial advantage versus
our competitors, who do not have such a guarantee for new customers.
Q591 Jim Cousins: Apart from that
fee, nothing was asked of you?
Mr Applegarth: Explicitly, no.
Q592 Jim Cousins: Implicitly?
Mr Applegarth: As Sir Ian and
the Chairman made plain, our communication to the regulator is
extremely close, of course, as our contact in the Tripartite.
They passed that information to the Bank of England extremely
Q593 Jim Cousins: I am talking here
about the Treasury, the Government's guarantee to depositors.
What implicit understandings were reached between the Treasury,
the Government and yourselves at the time that the deposits were
Mr Applegarth: For the facility
and guarantee to be in place we had to provide a viable business
plan, which is extremely closely monitored and scrutinisedthat
is where the "implicit" comes fromto make sure
we are performing as per the plan we had to provide to make sure
we are viable and solvent for the facility and guarantee to be
given. The only explicit requirement for the guarantee is for
the new depositors.
Q594 Jim Cousins: Can I stop you?
I want us to be clear about this. I am not talking about the facility
guarantee that was given by the Bank. I am talking about the guarantee
to depositors which was given by the Government.
Mr Applegarth: It is to do with
new deposits and it is the fee we have to pay to attract new deposits.
Q595 Jim Cousins: What implicit understanding
was reached between you and the Government at the time that guarantee
to depositors was given?
Mr Applegarth: It is the same
as we had to put in place for the facility to be granted, which
was the delivery of the viable and solvent business plan.
Q596 Jim Cousins: So there were no
additional requirements asked of you in exchange for the guarantee
Mr Applegarth: For existing customers,
no. For new customers, yes.
Q597 Jim Cousins: At the time the
guarantee to depositors was given, was any indication given to
you that that guarantee might in any way be time limited?
Mr Applegarth: Yes. The form of
words used was "during the current financial difficulties".
Q598 Jim Cousins: What did you understand
by that phrase?
Mr Applegarth: The foreseeable
future, during the period when markets were dislocated.
Q599 Jim Cousins: Let us be clear
about this. The lending facility is clearly time-limited at February
2008. Is the guarantee to depositors subject to any such time
Mr Applegarth: It does not have
such an explicit time limit. The phrase of words used both in
the public announcement and to us was "during the current