Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 620 - 639)

TUESDAY 16 OCTOBER 2007

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

  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 fair, yes.

  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 few days?

  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 concern—a lot of concern—to 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 England—not the use of it but the existence of a facility—and the reassurances that went with it about us being a solvent and profitable business did not have a sufficiently reassuring effect on customers.

  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 possible—not 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 us.

  Q627  Mr Brady: What steps have you taken to establish where it did come from?

  Mr Applegarth: None outside our company.

  Q628  Mr Brady: Do you propose to?

  Mr Applegarth: I do not see how we can.

  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 risk?

  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 comments?

  Sir Derek Wanless: We looked as a Board at the issues of our funding strategy and what the risks were.

  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 earlier, we—

  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 that liquidity?

  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 faced?

  Sir Derek Wanless: Clearly, this now having happened to everybody will stress-test—

  Q638  Chairman: So your stress tests were insufficient?

  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.


 
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