Examination of Witnesses (Questions 780
THURSDAY 25 OCTOBER 2007
MP, MR NICHOLAS
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 problemand 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 institutionsand I think they had
had discussions with Northern Rock, as you might expect, about
these thingsthey 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
Mr Darling: Hindsight is a wonderful
Q785 Mr Breed: I agree with that.
Would it have been preferable for them to have alerted you before
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
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 supportand it was very substantial
support; it could have been as much as £30 billionto
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 solutionand I was very clear about thisright
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
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 advisersand
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,
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
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.
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