Examination of Witnesses (Questions 680
TUESDAY 16 OCTOBER 2007
Q680 Mr Love: That did not happen.
Was that because of something that the Bank did or was it the
Takeover Panel rules that precluded that from happening?
Mr Applegarth: I understand in
the first instance it was because a facility similar to the one
we got was not available to the main high street bank at the time.
It was subsequently made available in the first weekend of the
run but, unsurprisingly, in the middle of a retail run it is difficult
to find a safe haven.
Q681 Mr Love: The final thing I want
to ask you is about whether it should be overt or covert. The
Governor told us it is a Directive from the European Union on
market abuse. There are many reasons why we would want to make
overt lots of things that would be covered by a Market Abuse Directive.
Would you be suggesting, from your experience, that we should
be thinking seriously about changing that and making it covert
in the very specific circumstances that you were facing?
Mr Applegarth: I think a general
rule that transparency is good I would sign up to, but there are
occasions where discretion of being able to make something covert
might have helped. The problem the bank would have faced even
if it could have made it covert is in practical terms because,
as proved by the leak to the BBC, in practical terms, there will
be so many people involved in terms of advisers, etc, that it
would have got out and that in itself would have been damaging.
If you think it is going to go out, you might as well try to manage
the communications well, and this is where I am in agreement with
the chairman: the probability of a run would have been lessened
had we been able to do the full communication over the Monday
morning as intended as opposed to having to rush the communication
on the Thursday morning.
Q682 Chairman: Sir Derek, when you
were Chief Executive of NatWest the Bank of England supervised
you. What was the difference in approach between the Bank of England
supervision and the FSA's now?
Sir Derek Wanless: The supervision
in the 1990s was a good deal more informal. The procedures which
exist under the FSA tended not to be there at that time and there
was a good deal more personal discussion.
Q683 Chairman: Would you say they
monitored liquidity and funding more in the Nineties?
Sir Derek Wanless: No.
Q684 Ms Keeble: I have a couple of
questions. What percentage of your mortgages were taken out in
the last couple of years, during your big expansion programme?
Mr Applegarth: We have been growing
our assets by 20% plus or minus 5% for the last 17 years.
Q685 Ms Keeble: If you could just
say the percentage by value, not by number, because presumably
they are a bit larger now.
Mr Applegarth: Yes. I would imagine
over the last two yearsand I will provide the exact number
for you in writingit probably accounts for around a third
of our current lending.
Q686 Ms Keeble: Earlier you said
that the average mortgage life on your books was three years.
Mr Applegarth: Three years one
Q687 Ms Keeble: If you say a third
of them are very new, what is the profile for the rest of them?
The point is really the length of time that people hold a mortgage
before they either pay it off or remortgage rather than the average
lifetime of the mortgage as you have got them now. They are obviously
two different things.
Mr Applegarth: Yes, of course
they are. The average life of a mortgage product is three years
one month. The length of time a customer stays with us, however,
is back up to seven years. Because, as the chairman said, we are
very good at retaining our mortgage customers, the average life
a customer is with us is extended but his mortgage product is
short. So what you are finding is mortgage customers are increasingly
having two or three or four products with us during their life
before they leave us. The mortgage productand it is the
mortgage product that you are fundinghas an average life
of three years one month.
Q688 Ms Keeble: Perhaps we can have
that profile when we get the figures. The other thing is that
you said much earlier on in the questionsand I might not
have got the wording exactly rightthat you had some more
risky investments that you moved off-balance sheet.
Mr Applegarth: Yes.
Q689 Ms Keeble: Can you just explain
what that was? It was just a throw-away phrase.
Mr Applegarth: Of course I can.
Under Basle II, when you get your Basle II approval, the relative
risk weighting of certain assets in your balance sheet changes.
So what we had, because of the quality of the loan book, was you
saw our risk weighting for residential mortgages come down from
50% to 15%. That clearly required less capital behind it, so that
links to why we were able to increase the dividend. We had some
assets whose risk weighting did not change. Commercial lending
is a good example. It remained 100% risk weighted. Relative to
the mortgages, which had gone down to 15%, they were therefore
less capital efficient and therefore it made sense to remove that
type of asset off the balance sheet. It also tied in well
Q690 Ms Keeble: Can you just say
again what they were? I did not catch it when you went through
Mr Applegarth: Commercial lending,
unsecured lending, commercial buy-to-let. Those were the three
Q691 Ms Keeble: Those you moved off-balance
Mr Applegarth: Those we announced
publicly that we were going to. We had only completed the three
parts of the commercial sale.
Sir Derek Wanless: We sold them.
Q692 Ms Keeble: I see. You sold them.
All of them, or you got through part of them?
Mr Applegarth: We sold all the
commercial, and it was in three stages, but clearly the market
dislocation has meant we have not been able to sell the unsecured
or the commercial buy-to-let. As markets return towards normal,
so we should be able to do that but that will take some time.
Q693 Ms Keeble: Can I just ask because
you said "the unsecured". Does that mean your new package
is included in the riskier portfolio? Can you just describe a
bit about the buy-to-let and why that is perceived to be riskier?
Mr Applegarth: Absolutely. There
are two types of unsecured lending. There is about £7.8 billion
of it. There is the unsecured lending that is bundled with it
to get the first-time buyer product and there is stand-alone unsecured
lending. Our aim was to sell the stand-alone unsecured because
the unsecured would together perform so well. Its three months
plus arrears are actually less than the industry average for secured
lending. So we looked to move off the balance sheet, sell, the
stand-alone unsecured and that accounts for 60% of that £7.8
billion. The risk weighting under Basle II did not go up. It was
just the relative risk weighting versus mortgages which came down.
The same applies to the commercial buy-to-let. The commercial
buy-to-let did not change its risk weighting, just relatively
compared to mortgages, which came down, made it look therefore
less capital efficient. So it is good-quality lending but it did
not fit in a high-quality asset balance sheet because we believed
that high-quality assets and transparency was the way to maintain
Q694 Chairman: You mentioned special-purpose
vehicles. You have the Granite special purpose vehicle. What is
the purpose of that?
Mr Applegarth: Granite is our
securitisation vehicle and accounts for roughly 50% of our funding.
The way securitisation works is you borrow against a pool of mortgages.
The bond holders, the people who are lending the money against
it, they carry the risk and therefore there can be no risk from
those loans to the PLC's balance sheet, so even though it is shown
in our balance sheet, it has to be a separate legal entity. The
separate legal entity is a master trust.
Q695 Chairman: Just one point there.
In the agreement with Northern Rock the Law Debenture Corporation
names a particular charity, Down's Syndrome North East, but this
charity has come out with a statement saying that they were not
Mr Applegarth: Indeed, and I regret
that. We have spoken to them and I have written to apologise.
The master trust
Q696 Chairman: They say they had
no knowledge of Northern Rock at all. That is what they said.
It seems an extraordinary step that you took.
Mr Applegarth: That is not true.
They had no knowledge that they had been named a beneficiary or
potential beneficiary if there was a windfall from the master
trust at some time in the future. Clearly they knew about us because
the reason they were picked is that in 2001 they were one of our
three corporate charities.
Q697 Chairman: You gave them £40,000.
Mr Applegarth: Yes, the staff
Q698 Chairman: What they are saying
is they were not consulted about this.
Mr Applegarth: It is not usual
to consult them but I have to say we have spoken to them and I
have written to apologise.
Q699 Chairman: Some would say it
is identity fraud if you use a name and they do not know about
Mr Applegarth: I would not go
so far as identity fraud but I have written and apologised and
they have accepted my apology.
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