Examination of Witnesses (Questions 760
THURSDAY 25 OCTOBER 2007
MP, MR NICHOLAS
Q760 Mr Simon: Exactly, which the
Bank has done this morning but the FSA certainly still has not
done. I understand that the best way to solve these problems is
to deal with the root causes and the core conditions and make
sure that they do not occur again. The question still remains,
if you find yourself in a crisis like this, are the structures
and the institutions which consist of all the key actors able
to withstand and to respond to the pressure? We still have Hector
McCarthy telling us each of us has discharged our responsibilities
and the structures worked. Plainly, they do not work.
Mr Darling: It is Hector Sants,
I think, and Callum McCarthy.
Q761 Mr Simon: They are as bad as
Mr Darling: I know you have created
a hybrid but I think they might take exception to that.
Q762 Mr Simon: I took exception to
them, I can tell you.
Mr Darling: I am very clear. This
is ultimately my responsibility to make sure that the FSA firstly,
is properly equipped to do its job and secondly, it is very clear
what the extent of its job is and where the boundaries are. Equally,
it is my responsibility ultimately to make sure the Bank also
makes improvements. I said this to the Commons the other day:
I have asked the FSA to let me have its proposals by the beginning
of the year and the Bank of England is doing similar work at the
moment. Thereafter I intend to publish my proposals, fitting in
with your own timetable. I would find it useful to get your observations
on these things before I publish the Government's proposals, which
I understand, given the timetable that I think you are working
to, would be perfectly possible but the answer to your comment,
Mr Simon, is that I think there is always room for improvement.
It would be nonsense to suggest that you could not improve the
present situation. I think we can but I think we need to be very
clear what problem it is we are trying to fix.
Q763 Mr Dunne: Chancellor, just in
response to Mr Simon you said that the big problem was liquidity
and that it had been identified and alerted to you that there
was a liquidity problem in the markets early in August, at the
beginning of this process. As you have accepted that you have
responsibility as lender of last resort, the Bank of England is
not independent in this context. What were you advising the Bank
of England to do in response to the obvious liquidity problem?
Mr Darling: The position is that
the Bank of England would provide lender of last resort facilities
but you are right that I have to authorise it, because ultimately
the Treasury might have to guarantee that or it might have to
support the Bank in doing so. The procedure is that the Governor
and the Chairman of the FSA would recommend, as they did, that
support to me. In relation to your other point, as I said, I think
in reply to Mr Fallon, when at the beginning of September it was
pretty clear that whatever Northern Rock was trying to do, it
did not look like it was going to work, we discussed both general
support in the market and I think it was a couple of days after
that, probably the 4th or 5th, that the Bank of England put about
£4 billion into the market but we also agreed right at the
start that, because of the importance to the stability of the
financial system, the systemic importance, we would have to support
Northern Rock as an institution.
Q764 Mr Dunne: Can I take you back
to the £4 billion? You identified earlier that this problem
was a global problem and was affecting markets in the United States,
in Europe and in the Far East. The central banks in those jurisdictions
were providing liquidity into the markets in August, not on 4th
or 5th September. You have not addressed my question as to what
advice you and the Treasury were giving to the Bank of England
to respond to this situation, which was global.
Mr Darling: We discussed this
on a number of occasions and the Governor's view was very firmly
that it would be very difficult to get sufficient money into the
hands of Northern Rock without putting ... Bear in mind that,
as of about a week ago, they told the committee they have had
to borrow about £13 or £14 billion from the Bank. To
get that sort of money into the hands of one institution you would
have to put many more billions of pounds into the market generally.
Given that the problem was not lack of capital but was instead
particular problems of liquidity for Northern Rock, the Governor's
very firm view was that that was not the right thing to do. Notwithstanding
that, as I say, on 4 August, in an attempt to try and free things
up and to encourage banks to start lending to each other, the
Bank of England did provide that support.
Q765 Mr Dunne: I think that was 4
Mr Darling: That is right.
Q766 Mr Dunne: You said 4 August,
Mr Darling: I am sorry; I meant
Q767 Mr Dunne: Had the Bank acted
in August in a modest way and shown a signal that it was prepared
to provide liquidity to the system, we might not have got into
Mr Darling: I think it is impossible
to say whether or not that would be the position.
Q768 Mr Dunne: This is what the ECB
did and what the Fed did and they have not had a run on a bank.
Mr Darling: Both in America and
in Europe banks have got into difficulties.
Q769 Mr Dunne: But they have been
able to handle it in a covert way, and we have not.
Mr Darling: It certainly was not
covert, either what the ECB did or what the Fed did.
Q770 Mr Dunne: But banks applying
for facilities to the Fed and the ECB have been able to do so
without it becoming public.
Mr Darling: I think the difference
is that in the United States they did make money available. It
did not stop three or four institutions from ... I think in fact
three or four institutions have actually had to close down in
the United States and have been taken over by other banks. In
Europe some of the smaller German banks got into difficulties.
So it is not just a problem for here. There are two things I would
say to you. One is we did have these discussions. Money was put
in, as I say, at the beginning of September.
Q771 Mr Dunne: Too late.
Mr Darling: No, I am not aware
of any evidence that we have that would demonstrate that had it
been done a week or two weeks earlier, that would have sorted
out Northern Rock's problem. The problem is Northern Rock would
have had to have got this money itself. The other banks, especially
the larger ones, were sitting on these things. The other thing
I would say is if you look now, two months later, it is interesting
that, although the Fed and the ECB and the Bank of England here
took different positions, the overnight interbank rates are pretty
close to each other, despite the fact that they took very different
Q772 Mr Dunne: Northern Rock top
management told us that had they thought about it early enough,
they could have used the ECB facility through their Irish subsidiary.
We have seen other UK banks now taking out multi-billion-dollar
facilities with the Fed, or so it has been reported, in order
to give themselves back-up lines. If we had a different system
applying in this country similar to either in the US or in the
ECB, surely this situation could have been avoided?
Mr Darling: There is always going
to be an argument as to whether you should have general intervention
or specific intervention. One of the things that the Bank of England
has said in today's report is that it clearly needs to look at
that as a result of what has happened. You are asking me what
discussions took place. The Governor, whose primary responsibility
it isone of the two core functions of the Bank is to maintain
the financial stability of the systemwas very firmly of
the view, as he told you when he appeared here two or three weeks
ago, and on other occasions too, was firmly of the view that he
was not convinced he would be able to get sufficient money into
the hands of Northern Rock, and it was into those hands that money
needed to go.
Q773 Mr Dunne: I have a specific
question on the timing of the Northern Rock situation, if I may.
You have told us that it became public knowledge, as we know,
on the evening of 13 September. Where were you on 14 September?
Mr Darling: I was in London.
Q774 Mr Dunne: Were you not at the
Mr Darling: That was later that
Q775 Mr Dunne: Do you think it was
advisable to go outside the country when we were in the midst
of the first run on a bank crisis we have had for 140 years?
Mr Darling: Two things. Firstly,
I was in London in the morning. I think I left about 10 o'clock.
The reason I went with the Governor was because at that meeting
I wanted to get European agreement to start looking at some of
the difficulties we had internationally, to look at what we might
do within Europe itself, and subsequently there has been agreement
that we need to do more. Frankly, Portugal is not the end of the
world; it is possible to receive information and issue instructions
from there, which I did, and I was back in London later that evening.
Q776 Mr Dunne: Over that weekend
you have just told us you changed your view about whether there
should be a bank deposit guarantee.
Mr Darling: Yes.
Q777 Mr Dunne: When did you first
start receiving advice that this might be necessary?
Mr Darling: We discussed it on
a number of occasions. The first time that I think the Tripartite
Committee, the three of us, agreed it would have to be done was
on the Sunday morning when we met.
Q778 Mr Dunne: When was the Bank
giving you advice that it was something you ought to consider?
Did you have advice prior to the Sunday?
Mr Darling: On the Sunday it was
the Bank's very firm view that unless we did something on the
guarantee, the problems were going to subsist and it is one that
I agreed with. My recollection is that it was raised with me in
more general terms prior to that but I would need to check to
be absolutely precise. As I said to Mr Fallon right at the start,
I do not think the absence of the type of guarantee that I announced
on the Monday was the problem on the Friday morning. I think the
problem on the Friday morning was that, when you think about it,
people were sitting at home, they saw on their television that
a fairly well-known bank in this country was going to the Bank
of England for facilities and therefore a fairly large number
of people went down to Northern Rock the next day to get their
money out. It was really over the weekend that especially a lot
of comment in the newspapers and on television about just how
much money is guaranteed that the guarantee really came into play.
As I say, guarantees themselves are difficult. As you can see
just now, I have given a guarantee which is giving Northern Rock
the breathing space that it needs but none of these things are
problematic. I was quite clear by Monday that it was necessary
to go further than what had been said over the weekend and issue
Q779 Mr Dunne: Did you get advice
from Number 10 Downing Street on Sunday?
Mr Darling: No. I have said on
many occasions in the last ten years, I am in regular contact
with the Prime Minister for all sorts of reasons but no advice
was issued on that point.