Examination of Witnesses (Questions 620
TUESDAY 16 OCTOBER 2007
Q620 Mr Mudie: Specifically when
did they tell you that the facility was transferable?
Mr Applegarth: The Governor made
it clear on that weekend, so that would be 15-16 September.
Q621 Mr Brady: The Governor of the
Bank was very clear with us that the freedom of manoeuvre the
Bank had was severely constrained by EC legislation, including
the Market Abuses Directive, the Takeover Code and some other
things. Could you talk us through the discussions you had with
the Bank and the FSA specifically about the disclosure requirements
relating to the lender of last resort?
Mr Applegarth: We were in the
process of taking legal advice about whether such a facility would
have to be covert or overt. The Board had not actually made that
decision but our advisers were, I think, giving us clear advice
that it would have to be overt and the FSA told us that their
view was the same. So both our legal advisers and the FSA came
to the same guidance for us.
Q622 Mr Brady: So you had both come
to that conclusion independently. It was not that Northern Rock
was saying "We will have to disclose this even if others
want it to remain covert"?
Mr Applegarth: I think that is
Q623 Mr Brady: Looking again at the
question of why the run happened, there has been some talk about
the leak of the facility. Do you think the run would have been
avoided had the leak not happened, if you had had those extra
Dr Ridley: Yes, the answer to
your question is that had the leak had not happened and we had
been able to announce on the Monday the facility with the Bank
of England in a measured fashion, with full communication plans
in place, undoubtedly there would have been some concerna
lot of concernto many of our customers but we think it
would have been considerably less than it was in the way that
it came about. Nonetheless, I think it is worth reflecting that
all of us, both here and in the authorities, were surprised by
the degree to which the announcement of a facility from the Bank
of Englandnot the use of it but the existence of a facilityand
the reassurances that went with it about us being a solvent and
profitable business did not have a sufficiently reassuring effect
Mr Applegarth: I slightly disagree
with that. I think there are three things that would have stopped
the run. The first is had we found a safe haven with a major retail
brand and had that offer in place. The second is had we been able
to borrow using the same type of facility that we have used but
general. So had the facility not been bespoke to us but a general
facility, I think that would have stopped it. Had the bespoke
facility been covert, that would have stopped it but I do not
think that last one could have happened. I think the chairman
is right in that the probability of a retail run would have been
lessened had we been able to do the announcement as we had intended
on the Monday, to be able to put facilities in place and also
to actually improve our ability to get the money to the customers.
One of the things we had intended to do over that weekend was
to widen the bandwidth on the internet account so you would not
have had so much frustration from our internet customers. We would
have been able to get the money back to customers better. I still
think it would have been unsettling for retail customers just
based on the language used. As soon as you have language used
in terms of "lender of last resort" and "liquidity
problems", that would frighten me as a retail customer.
Dr Ridley: I agree.
Q624 Mr Brady: You say that a covert
facility would not have been possiblenot possible because
of the legal or regulatory requirements or not possible for the
purely practical reason that it simply would have come into the
public domain by one means or another?
Mr Applegarth: I think both of
those. Firstly, the legal advice that we were getting that it
was most probably announceable, and that was the FSA's view as
well, and secondly, and secondly, because there were so many people
involved, in practical terms it would have leaked, and having
seen what has happened since 13 September and what has got in
the public domain, I think that is a pretty strong probability.
Q625 Mr Brady: Albeit despite sensible
clarification of the position that the leak was not solely responsible
for the run
Dr Ridley: I am sorry. I did not
mean to imply that at all.
Q626 Mr Brady: No, I completely accept
that. Given the clarification that took place, if the leak was
not solely responsible for the run, it did clearly exacerbate
it; it did take some of that time away from you and clearly therefore
it is a hugely important factor in the way events developed. You
said in response to an earlier question that you are very confident,
you know the leak did not come from you, you are very confident,
I think the implication was, did not come from Northern Rock.
What kind of inquiry have you mounted within Northern Rock, including
presumably your advisers, to establish with absolute certainty
that the leak did not originate there?
Mr Applegarth: I do not think
you can establish with absolute certainty that it did not, because
you do not have monitored telephone calls and whilst you can ask
to see written correspondence, that does not stop somebody briefing.
Given that it was massively not in our interests or our advisers'
interests to leak it, and given the clear answers we have been
given when we asked the people concerned, because we kept it down
to as small a bunch as possible within the company advisers who
knew, as far as is certain, I am sure that it did not come from
Q627 Mr Brady: What steps have you
taken to establish where it did come from?
Mr Applegarth: None outside our
Q628 Mr Brady: Do you propose to?
Mr Applegarth: I do not see how
Q629 Mr Brady: Sorry, you said not
outside the company. What steps have you taken within the company?
Mr Applegarth: Clearly, we have
gone to the people who knew about it, who were employed by us,
either on our payroll or as advisers, and asked them. You cannot
prove or disprove that somebody gave a verbal briefing.
Q630 Mr Brady: Do you have a view
as to where the leak did come from?
Mr Applegarth: Other than I am
pretty damn sure it did not come from inside Northern Rock or
our advisers, no.
Q631 Chairman: Could I just go back
to Sir Derek Wanless and ask about the Risk Committee which he
chaired: did it have the specific policies for managing liquidity
Sir Derek Wanless: The Risk Committee
is a strategic level committee of the Board which meets three
times a year. The issues about liquidity and treasury risks were
set out by the Board and the Risk Committee monitored that on
a regular basis at each of its meetings.
Q632 Chairman: Did you have an active
management policy for measuring liquidity risk? That is what I
am asking you.
Sir Derek Wanless: We have reports
on liquidity risk which the committee sees.
Q633 Chairman: If you had an active
policy, why did it not work? The thing is, I want to get back
to the Bank of England and the FSA. The Bank of England said in
April, "It is important that firms stress-test and take those
stress tests into account." Secondly, the January 2007 FSA
report says about risks for firms and markets that "if economic
conditions were to deteriorate, this could lead to crowded exits,
draining liquidity from the market and causing erratic price swings
in commodities, etc." Did you as a Risk Committee study those
Sir Derek Wanless: We looked as
a Board at the issues of our funding strategy and what the risks
Q634 Chairman: I am asking specifically
were the FSA and the Bank of England reports discussed by your
committee in terms of liquidity and how it could seize up?
Sir Derek Wanless: Those reports
were discussed as part of the ICAAP work. For the whole of this
period we were working with the FSA on our ICAAP.
Q635 Chairman: So what did you do
when the FSA in January said that it could lead to crowded exits,
draining liquidity from the markets?
Sir Derek Wanless: As we explained
Q636 Chairman: No, you see, your
explanation is not sufficient because at the end of the day, you
found yourself in a position where no-one else in the UK found
themselves. That is what we are talking about as a Committee,
that this is unreal. What did you do as a committee in terms of
Sir Derek Wanless: We were going
through a process at the time of scenario stress-testing which
involved looking at 20 scenarios which the Board had signed off.
Fifteen of those scenarios involved liquidity risk, including
two where securitisation became a particular problem. What did
not happen was that we stress-tested the scenario of what has
actually happened, which is, as we said earlier, that there was
an unprecedented and unpredictable change in the market basis.
Q637 Chairman: Can I ask then, in
terms of stress tests, do you think stress tests should now include
more extreme scenarios such as the one you that you have recently
Sir Derek Wanless: Clearly, this
now having happened to everybody will stress-test
Q638 Chairman: So your stress tests
Sir Derek Wanless: Our stress
tests at the time were exactly what they should have been, that
we agreed with the FSA
Q639 Chairman: No, no, no. At the
end of the day, here we find ourselves in a situation where you
are the first bank to have a run in 140 years. Were your stress
tests sufficient? That is the question.
Sir Derek Wanless: Our stress
tests at the time were sufficient. That is the point I am making.