Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 780 - 799)

THURSDAY 25 OCTOBER 2007

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

  Q780  Mr Breed: Chancellor, earlier on in the meeting you said that you first became aware at the beginning of August of the problems with Northern Rock, yet we were told by the FSA that they were concerned much earlier in the year, had issued a warning about the business model, and indeed, had even put them under close supervision. Are you saying that the Tripartite authorities had not been advised by the FSA of their concerns over Northern Rock and that the first time they issued that to the other parties was the beginning of August?

  Mr Darling: I think 14 August was the first time that the FSA formally said when looking at this problem—and remember, I think the week before, when problems had arisen in France, people started focusing on these things. On the 14th, which I think was a Tuesday, was the first time they said, "We think Northern Rock might have a problem." You are right that the FSA and I suppose more generally the Governor of the Bank of England have raised concern about these things. The only observation I would make is that, whilst there has been generalised concern expressed about this aspect of the banking system, I do not think anybody expected a complete freezing of liquidity which, as far as I am aware, is completely unprecedented in modern times.

  Q781  Mr Breed: But two members of the Tripartite Authority were concerned and they did not bother to tell the third part.

  Mr Darling: I think in the normal course of events what the FSA and what the banks say is publicly available. I do not think they were keeping it from anybody. It was a more generalised concern. I think what was unforeseeable when you think about it is this: people start to default on their mortgages in one or two American states; within days it spreads throughout the United States and then across the world. I do not think that had been foreseen before.

  Q782  Mr Breed: Chancellor, you have been talking about the problems of debt and the problems that some banks may have for quite some time. This was obviously in the context of a background where there were concerns for a long time, yet apparently the Tripartite authorities did not actually have a formal note from everybody all together until some months after the FSA and the Bank of England had expressed concerns about the whole situation. How could it be said that the Tripartite authorities are actually working in any meaningful sense between about May and August?

  Mr Darling: Firstly, you mentioned debt. I am not sure whether you mean corporate or personal debt.

  Q783  Mr Breed: Both.

  Mr Darling: That actually was not the problem which confronted us in August. The problem that confronted us was whilst the institutions right across the world had lots of money, they simply stopped lending to each other. That is what was unusual in the present situation and that particular set of circumstances was not specifically envisaged by the FSA or anybody else this year. What the FSA were saying is that in relation to one or two institutions—and I think they had had discussions with Northern Rock, as you might expect, about these things—they had a more generalised concern. This is one of the things, and as I said to you, questions do have to be asked in relation to the regulator, the FSA, and all of us. When you get a general concern, how quickly do you move from dealing with that general concern to actually saying, "Look, here are half a dozen things you ought to be doing"?

  Q784  Mr Breed: In hindsight, would you have preferred that they had actually raised it with you before 14 August?

  Mr Darling: Hindsight is a wonderful thing.

  Q785  Mr Breed: I agree with that. Would it have been preferable for them to have alerted you before 14 August?

  Mr Darling: In hindsight, it would have been much better, would it not, if the FSA when first looking at Northern Rock had said, "Hold on, what exactly is your fallback position?" and when Northern Rock said, "We haven't got one" they did something about it?

  Q786  Mr Breed: Do you think the Tripartite Authorities should have all been aware of the concerns of at least two of them on one particular institution?

  Mr Darling: They were not expressing concern about one institution at the beginning of the year.

  Q787  Mr Breed: You just said that they were both expressing concerns about Northern Rock.

  Mr Darling: The Bank of England expressed a general concern. I think it was a speech the Governor gave at the beginning of this year. The FSA had been talking to Northern Rock and suggesting it did some stress-testing of its systems. When you think about it, at the moment the FSA regulates hundreds of institutions. Some of those concerns they will raise, they will deal with and they will never come back and trouble anyone again. They have to exercise a judgement as to whether or not there is a particular concern that is so great, that is not going to be resolved, that then leads to a systemic problem.

  Q788  Mr Breed: So their judgement was lacking in this particular case. Can I just turn very quickly to the possibility of the so-called safe harbour or safe haven, the other bid? You seemed to indicate that in fact there was not a substantial bid ever being able to be considered by the bank or anything else?

  Mr Darling: That is right.

  Q789  Mr Breed: Mr Applegarth, the Chief Executive of Northern Rock, said to us that had a facility been granted to the bank, "I am led to believe that we would have had a good to consider and I suspect that, had an offer been made with a big retail brand, then the run would not have taken place."

  Mr Darling: I assume you are quoting from him when he said "I am led to believe." It sounds as if the thing was rather contingent but my understanding of what happened is this. There were actually two institutions. One showed a slight interest but it never really progressed further than a general inquiry. There was a second interest which was raised with the FSA and at one point they asked what would we do if they asked for support—and it was very substantial support; it could have been as much as £30 billion—to be given at commercial rates by the Bank of England. Our initial reaction was twofold. One is that the Bank of England does not normally provide, in effect, investment help for a perfectly viable bank. The second point is that there would also be a state aid issue, I think. The third one is, if we were going to do this, we would almost certainly have to say to banks at large, "If we are making this facility available, who else might be interested in that?" However, in the event the matter was not pursued.

  Q790  Mr Breed: In that event, do you believe the Tripartite Authority should be only reactive or do you believe they should in these circumstances be more proactive?

  Mr Darling: No, I think they should be and they were proactive. I said earlier on that the FSA, discharging its duty, was looking to see who might be willing to acquire part or all of this business, who might be able to help Northern Rock out. It was not for the want of trying. It was as this situation developed. The market is a pretty small place; people knew Northern Rock had problems and, whilst there was an interest earlier on, as I have just been talking about, the fact that that particular institution, after I think it was two or three days said "No thanks" perhaps indicates the problem that we were up against. The ideal solution—and I was very clear about this—right from the time that I first became aware of this would be, if Northern Rock could either be acquired, merged with or find another institution, because that would have been by far the best option. If that had come along and we were able to help in respect of that, then of course we would have done so. The difficulty was that, as the days went by, it was increasingly obvious that people just did not want to know. That was the problem.

  Q791  Mr Todd: The stories the BBC ran led to the queues forming outside Northern Rock and, obviously, the bank was completely unprepared for that event and had not prepared any communication strategy to tell its customers. Have you conducted any leak inquiry into where that leak may have come from?

  Mr Darling: No, and I suspect, having had some experience of leak inquiries, it would be as successful as every other leak inquiry that has ever been held. It is of course open to you, if you wish, to summon people to ask them how it might have happened.

  Q792  Mr Todd: It clearly was not in Northern Rock's interest to disclose this information.

  Mr Darling: I do not have the powers to summon anyone that I might suspect and pin them against a wall and demand they tell me but it was clearly very unhelpful and whoever did it, he or she has not paid the price but others have. In relation to the more general point, again, in retrospect, I think Northern Rock could have perhaps managed those queues better than they did. The fact that there are only four branches in London and the fact that they are used to dealing with a very small number of people each day means you do not have to have too many people coming into the place before you get the queues out of the front door.

  Q793  Mr Todd: Indeed, one of their problems was the rather small number of depositors they had.

  Mr Darling: I think I am right in saying they have about 70 branches in the whole of the country and there are only four in London.

  Q794  Mr Todd: Do you think that one of the difficulties was that Northern Rock would have had to have disclosed anyway that they were receiving lender of last resort backing because this would have led to a profit warning? Is there some merit in looking at whether, in these very specific circumstances, some greater confidentiality might be applied, or do we just have to live with the transparency and accept the consequences?

  Mr Darling: I think that is a very good point and it is one that affects not just the central bank here but across the world. I was very clear from the beginning of that week that, whatever happened, it would almost certainly leak because that is the way of things, not necessarily from someone doing it quite maliciously but what was happening in the days before that is that people were phoning up banks saying "Have you been to the Bank of England?" Of course, the people who had not, were anxious to say "No, no, never in a month of Sundays" and gradually ... It is rather like, as MPs, we are well aware of the journalists' round robin on a Friday afternoon: "Have you or do you know anyone who ever has?" and the minute you do not say anything, they finger you because you do not deny it. This is a problem. On top of that, in relation to Northern Rock, their legal advisers, as I understand, had told them they would have to issue a profits warning, not surprisingly, and they were also, I think, given advice that, given the fact they had gone to the Bank of England or were about to go to the Bank of England, they would have to disclose that. The choice is whether you try and do that in an orderly manner, and the only thing I was wrong about the leak was the timing of it, but it is a problem. As I said to Mr Fallon, if central banks are to do their job, there will be times when they need to do things without people being aware of it for the greater public interest.

  Q795  Mr Todd: There is one other possible framework, which is that the lender of last resort facility could have been put in place rather more rapidly than it was, giving less time for a leak to occur. Northern Rock have claimed that it took some time to put this in place; they had a plan to communicate to their customers about it; that was foreclosed by the leak that took place. Another approach, as I said, would be to concertina that negotiating process into a much narrower period.

  Mr Darling: We actually did it quite quickly. As I said before, it is the directors who are running the bank and they did not actually come to the Bank of England and say, "Look, we actually now need facilities" until the week in question, and once they had agreed to come, there was no problem whatsoever. It was not like filling out a form for a personal loan or anything like that. They were able to get the facilities when they wanted them.

  Q796  Mr Todd: They say they kicked off on 10 September and they were intending to announce a week later, which I must admit gives a huge opportunity for a leak.

  Mr Darling: My recollection is they did want a longer period but I think two things went against that. Firstly, it would have been astonishing if you could have kept that quiet for a week. Secondly, their own legal advisers—and directors have fiduciary duties. This bank was trading. They had to issue a profits warning because the last profits forecast they had made had turned out to be wildly optimistic and they have had to suspend payment of a dividend in the meantime. The profits warning requirement drove that as much as anything else but my understanding is they would have had some difficulty issuing a profit warning without mentioning the fact that they were also seeking facilities from the Bank. These are things we really do need do need to look at. We cannot have a situation where you can only provide support at such a cost that nobody is actually going to take it. That flies in the face of the whole concept of lender of last resort.

  Mr Macpherson: Further evidence of the difficulty of keeping these things secret is provided by the general standing liquidity facility which was available through August. You will recall that one clearing bank had access to it. It was supposed to be secret but it was in the newspapers the next day with a subsequent effect on the share price. It is really, really difficult.

  Mr Darling: Can I just say for the sake of clarity that the reason that bank got the facility is not because it was in trouble but simply it was squaring its books at the end of the day. This is the point I was making, that people did a phone round and only one person said "I can't comment."

  Chairman: In fact, the Chief Executive said it was awash with cash.

  Q797  Ms Keeble: Just to wrap up this last point, do you not think there is a fair point that, if people have their money in a bank and it is in difficulties of the type that Northern Rock was in, actually people are quite entitled to know what should happen about it and what the prospects are for it having to go to the Bank for a facility?

  Mr Darling: I thought you were going to make a separate point about the deposit protection scheme, which I think we are probably agreed on. I can understand the point that you make in relation to that but I think there are times where if something can be done to tide over a bank that might be in difficulty, that maintains its position and, importantly, the position of the whole banking system, then that is justified. I would be reluctant to get myself into a situation that if you had to make a public announcement every time you did anything, you might actually make a difficult situation that much worse. I certainly would not want to see queues outside every bank as a matter of routine. The banking system is hugely important to us and I think it is probably far better that we can do things ... It depends on the circumstances butI think sometimes covert operations can be very much in the public interest.

  Q798  Ms Keeble: Can we move on to the Tripartite Authority and the Treasury's role on it? You did say previously that you had only known in August about the problems with Northern Rock but both the FSA and the Bank had both talked in general about being aware of the general problems, which I am sure you were as well. I wondered if you had done any scenario planning in the Treasury as to what the implications might be of the fall-out of the sub-prime market problems in the US.

  Mr Darling: There are two things. Firstly, you are right that there was a generalised awareness of the problem but certainly not about specific institutions and certainly not about Northern Rock. I think the existence of and the consequences of people lending in the sub-prime market really only came to people's notice probably in about July. In relation to stress testing, the Treasury has carried out exercises. If you do not mind, I will ask Nick; it was before I came to the Treasury. It did actually carry out a stress test earlier this year but that was in relation to a slightly different scenario. It was more of a terrorist-based one.

  Q799  Ms Keeble: Could we have a note on it, because I have some other questions.

  Mr Darling: Yes, if you want to have a note on it, I will happily do that.[2]


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