Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 760 - 779)

THURSDAY 25 OCTOBER 2007

RT HON ALISTAIR DARLING MP, MR NICHOLAS MACPHERSON, MR MARK NEALE, MR RICHARD HUGHES AND MR CLIVE MAXWELL

  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 each other.

  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 September.

  Mr Darling: That is right.

  Q766  Mr Dunne: You said 4 August, I think.

  Mr Darling: I am sorry; I meant September.

  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 this problem.

  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 approaches.

  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 is—one of the two core functions of the Bank is to maintain the financial stability of the system—was 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 ECOFIN meeting?

  Mr Darling: That was later that day.

  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 that guarantee.

  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.


 
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