Examination of Witnesses (Questions 640
TUESDAY 16 OCTOBER 2007
Q640 Chairman: So they were sufficient
and you got yourself into this situation. Why did not other banks
in the country not get themselves into it? Why are you alone?
This is the question we as a Committee are asking. Why are you
alone here, Sir Derek?
Sir Derek Wanless: What we are
required to do is to look at
Q641 Chairman: Why are you alone,
of all banks?
Sir Derek Wanless: I think we
went earlier through the issue of what might have been happening
in other banks.
Q642 Chairman: Why are you alone?
That is the question. Why do you stand on your own? Why are you
an orphan in the banking sector?
Sir Derek Wanless: We do not know
precisely what the position was in other banks. Clearly, we are
the only bank that has had a run.
Q643 Chairman: You are the only one
who went to the Bank of England.
Sir Derek Wanless: We are the
only bank who have had a run. That was crystal clear.
Q644 Chairman: You see, I put it
to you thatand this was mentioned in one of the newspapers
this morningwhen rival mortgage banks were scaling back
their lending in 2007, you were accelerating yours. As the Daily
Telegraph said this morning, almost one in five loans in the
first half were provided by yourselves, and therefore that decision
to expand aggressively is key to this situation. You as a Risk
Committee and you as the Chairman of the Risk Committee did not
do your job, Sir Derek. If you had done your job, you would have
brought to the attention of the Board the comments of the FSA
in January, the comments of the Bank of England in April and then
had a strategy early on in that year to deal with the situation
where you did not find yourself in the iniquitous position of
being the only bank in the United Kingdom to face this situation
and going cap in hand to the Bank of England, to end up in a situation
where your bank is effectively nationalised; it is the taxpayer
that is supporting your bank at the moment.
Sir Derek Wanless: The position
is not like that at all. The position is we were stress-testing,
plausible stress tests
Q645 Chairman: You were stress-testing
but your stress-testing was not enough, because you ended up in
this inglorious situation.
Sir Derek Wanless: Our stress-testing
was, as stress-testing, plausible and
Q646 Chairman: This is unreal.
Sir Derek Wanless: No. The position
is, and it was confirmed to you by the FSA, who said no reasonable
professional would have forecast the set of circumstances that
happened. They also
Q647 Chairman: The FSA never said
to us that no-one could have found themselves in this position
but Northern Rock, so the FSA did not come here and give you support
as Northern Rock so do not try and kid us on that.
Sir Derek Wanless: I am not. The
FSA said, and others have said too, that what has actually happened,
the sequence of events, was not something which was regarded as
a plausible stress test at the time. The FSA were talking to us
all through that period. We as a Board were looking at the scenarios
which we were stress-testing. Of course, since this has happened
people will do different stress tests but the stress
Q648 Chairman: The FSA said to us
that they have to learn lessons on stress-testing. Implicit in
that is the fact that your stress-testing was not enough and that
is how you found yourself in this embarrassing situation, and
you, as the chairman of the Risk Committee, should have been alert
earlier on in the year when the FSA and the Bank of England were
giving these warnings, and I put it to you that you were not doing
Sir Derek Wanless: No, we have
made it clear that the stress-testing was tested against a tightening
of the credit markets, which we expected, and our strategy, as
Mr Applegarth explained earlier, was actually slowing down the
growth of assets and selling books, for example, the commercial
lending book. So we were taking action through the half-year.
We did not foresee the unprecedented and unforeseeable changes
and the sequence of events that have happened. That is very clear.
Q649 Chairman: So at the end of the
day your answer to us is unsatisfactory. You do not really know
how you got yourself in this situation where you are alone in
the United Kingdom.
Sir Derek Wanless: No, we know
Q650 Chairman: You, as the chairman
of the Risk Committee, did not do your job.
Sir Derek Wanless: The Risk Committee
and the Board did its job, in my view, properly through this period.
Q651 Chairman: It did its job and
it ended up in this hugely embarrassing situation, causing pain
to people in the North-East, not least your employers in the community.
But you did your job. That is what you are saying to me this morning.
Sir Derek Wanless: What I am saying
to you is there is a sequence of events that go through from sub-prime
problems in the States to the run on Northern Rock which requires
a good deal of careful analysis to find out what the issues are.
Q652 Chairman: You are out of step
with every other retail organisation in this country and you have
no adequate answer to this Committee as to why you stand on your
Sir Derek Wanless: We were an
outlier in terms of wholesale lending in total, securitisation
in total. That is true and the figures show that. We were not
an outlier in terms of maturity, the structure of the wholesale
Chairman: You ended up in disgrace. That
is the issue.
Q653 Mr Fallon: You have made it
clear that you stress-tested some aspects of securitisation, Sir
Derek. Because you were over-dependent on the wholesale markets,
what you did not stress-test were movements in the interbank rate.
That was the position, was it not? This whole business model was
a gamble on interest rate movements.
Sir Derek Wanless: No, it was
not and is not a gamble in that sort of way. The issue that has
happened is a complete drying up of liquidity, not an issue about
price. We expected the price would change in the marketplace and
that the tightening that the chairman referred to would be a tightening
of pricing in the marketplace and therefore it would cost us more
to raise securitisation. That was something we expected and it
was something that we were planning for.
Q654 Mr Fallon: You mean you were
ready for any kind of increase in the interbank rate?
Sir Derek Wanless: We were ready
for foreseeable changes in our securitisation pricing. If you
look at the prices of our securitisation, if you look at what
happened in May, when we raised £4 billion through a Granite
issue, it was oversubscribed and at attractive prices. There was
no indication at that time, as late as May, that good-quality
UK mortgages, put into a securitisation vehicle, was going to
be a difficulty in terms of raising funds.
Q655 Mr Fallon: So there was no increase
possible in the interbank rate that you did not stress-test?
Sir Derek Wanless: We have not
had a problem with change in the interbank rate since August.
The issue certainly affects profitability but that is not the
issue we are here to talk about. Certainly our underlying profitability
is impacted by changes in margins but we had actually taken a
good deal of action as early as January of this year to prevent
any mismatch in interest rates from hitting our bottom line.
Q656 Mr Fallon: It was your job and
your Risk Committee's job to assess properly the risk of illiquidity
and to ensure the Board was prepared against it. You failed and
that is why you have ended up dependent on £13 billion worth
of public money.
Sir Derek Wanless: We take at
each time, because we only have foresight, not hindsight ... When
we looked at our funding strategy and had a very clear strategy
which said the first line of defence is good credit quality. The
first line of defence is to make sure we have available so we
can securitise or put into covered bonds good-quality mortgage
assets and that we have. Nobody has criticised, in fact people
have indicated to you, I think, that we have good-quality assets.
That was the first issue, so that the markets would distinguish
between what were clearly very poor US sub-prime loans and good-quality
UK loans. The first line of defence. The second line of defence
was to increase our retail deposits, which we did both in the
UK through a different product range and also in Denmark through
opening a subsidiary there which was successful in raising funds.
We then opened up a securitisation covered bond and wholesale
markets geographically round the world. To have tested the scenario
which said that what would happen was all of those markets and
all of those geographies would close and be closed for a prolonged
periodbecause clearly we can cope with short periods of
closure of those marketswas unprecedented and unforeseeable
and therefore it was not in our stress tests.
Q657 Mr Fallon: Do the four of you
realise the damage you have done to British banking?
Dr Ridley: We realise very acutely
the pain and distress that has been caused to our customers and
to others in the banking industry, yes.
Q658 Chairman: Can I just ask Sir
Derek again, to follow that up, 75-80% of your business is depending
on mortgage. Is that right?
Sir Derek Wanless: On securitisation,
Q659 Chairman: These are public figures.
Let us look at HBOS. They are the biggest mortgage lender and
only 20% of their profit is gained from it, so diversification
is important. You were not diversified enough, Sir Derek. That
was how you got yourself as a company into this situation. It
was too late.
Sir Derek Wanless: The company
has had a very successful strategy, which