Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 580 - 599)

TUESDAY 16 OCTOBER 2007

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

  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 in—I 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 funding—not 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 the question.

  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 swiftly—

  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 guaranteed?

  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 scrutinised—that is where the "implicit" comes from—to 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 to depositors?

  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 limit?

  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 financial difficulties".


 
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