Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 680 - 699)

TUESDAY 16 OCTOBER 2007

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

  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 years—and I will provide the exact number for you in writing—it probably accounts for around a third of our current lending.[6]


  Q686  Ms Keeble: Earlier you said that the average mortgage life on your books was three years.

  Mr Applegarth: Three years one month, yes.

  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 product—and it is the mortgage product that you are funding—has 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 questions—and I might not have got the wording exactly right—that 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 it.

  Mr Applegarth: Commercial lending, unsecured lending, commercial buy-to-let. Those were the three prime areas.

  Q691  Ms Keeble: Those you moved off-balance sheet?

  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 liquidity. Wrong!

  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 consulted.

  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 raised £40,000.

  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 it.

  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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