Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 640 - 659)

TUESDAY 16 OCTOBER 2007

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

  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 that—and this was mentioned in one of the newspapers this morning—when 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 your job.

  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 exactly—

  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 own.

  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 lending.

  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 period—because clearly we can cope with short periods of closure of those markets—was 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, on non-retail.

  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—


 
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