Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 820 - 839)

THURSDAY 25 OCTOBER 2007

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

  Q820  Mr Mudie: When they got the facility that they still have, and they have now borrowed up to £16 billion of it, what was the total amount?

  Mr Darling: I will come on to that in just a moment but there is a world of difference between providing public funds at commercial rates to a bank that was a going concern—

  Q821  Mr Mudie: No, no, Chancellor. Rates we will come to and I understand that but it is the facility.

  Mr Darling: The facility that this possible bidder was asking for was to a commercially viable going concern. It was entirely different to Northern Rock, which by the time it asked for lender of last resort was in a much more difficult position, and the lender of last resort facilities, as Northern Rock have said, they have drawn about £13 or £14 billion from that, that—

  Q822  Mr Mudie: What is the total you have agreed with them?

  Mr Darling: What we have agreed—and again, Clive Maxwell will set this out in further detail—is that they have that facility but it is secured against collateral. We have also guaranteed various deposits but of course, we fully expect to be able to get that money back.

  Q823  Mr Mudie: Why will you not tell us the facility? Is it £30 billion?

  Mr Darling: I can. I can tell you what it is. The terms of the guarantee have been set out, I have written to both the Chairman of this Committee, so you should all have the terms and details of it, as well as the PAC see in the normal way, so you can see what the terms are.[4] Because the money has not been drawn out of the bank, it has not actually cost us anything yet and I am confident it will not be because, apart from anything else, we are taking collateral.

  Q824  Mr Mudie: So it is £30 billion?

  Mr Darling: No, it is not. Not at all. I will be very clear about this, Mr Mudie, because you do need to be clear about this. There is a world of difference between a loan of £30 billion to a commercial going concern and lender of last resort facilities, which are actually less than that, and what the Government is guaranteeing is the deposits. As the deposits are in the bank physically at the moment, and as we have collateral against which they are secured, it is not the same thing as giving a bank £30 billion worth of credit. Just for the sake of accuracy, have I got that right?

  Mr Maxwell: I think that is absolutely right.

  Q825  Mr Mudie: You are sacked if you say no!

  Mr Darling: It is me I am thinking about!

  Mr Macpherson: The critical thing in the terms is the rate and also, to use the term of art, the haircut, i.e. how much collateral you have to put up in exchange for the support.

  Q826  Chairman: We all know what a haircut is but just explain it for the public.

  Mr Maxwell: A haircut is the amount of discount you set against some collateral that somebody provides against a loan, so if you are making a loan to somebody and you take an asset which on the face of it is worth £100, you might apply a haircut to that so that you consider it as being worth £90 because you do not know how much it might be worth in the future. That is how a haircut works.

  Chairman: A neat job!

  Q827  Mr Love: In answer to a question earlier, you said that you as the Chancellor were ultimately responsible, and the Committee accepts that. Our difficulty has been in finding out before you entered the foray who was responsible amongst the Tripartite Authorities. Was anyone responsible and, more importantly, should someone be responsible in the future?

  Mr Darling: The answer to the question is I am always responsible. Even if one of my officials attend the Committee, I am responsible for the actions of my officials. I am very clear about that. It is what ministerial responsibility means.

  Q828  Mr Love: You do not think prior to your involvement someone should have been taking responsibility in the Tripartite, or do you assume that the Treasury takes responsibility?

  Mr Darling: Maybe we are at crossed purposes here. Whatever Treasury officials do on my behalf, I am responsible for that. I carry the can. In relation to the Tripartite Committee, obviously, as a matter of routine, officials—deputies, as they are called—attend it because, if you look at the ten years it has been set up, there will be many meetings that are fairly routine and you would not expect the Chancellor to necessarily attend those but in relation to when it became clear that there were problems, sometimes the deputies attended, sometimes I attended myself but, whatever happened, I would have been told about it immediately so I knew about it.

  Q829  Mr Love: I am obviously not getting anywhere with this. Can I take it from a different angle? There are many that say, because the Bank has responsibility for providing liquidity into the market and also has overall responsibility for stability of the system, that it is pre-eminent in the Tripartite arrangements. Would you agree with that?

  Mr Darling: Its core responsibility to maintain the stability of the financial system is set out in its objectives and that is a position, a job, that the Bank does day in, day out through its money market interventions. I think I said in relation to Mr Mudie's point that is its responsibility, yes. However, the whole point of a Tripartite committee is because it recognizes that the FSA and ourselves, the Treasury that is, have an interest in it and that is why there is that committee. Ultimately, as I say, whatever the Bank does, we stand behind it.

  Q830  Mr Love: The Bank today published its financial stability report and it has been widely interpreted in the media as suggesting a strengthening of its pre-eminence in the Tripartite arrangements. Would you support that strengthening?

  Mr Darling: There are two things. One is, the way I would interpret it, and rather more than that, the way I understand it, is that the Bank is very clear that it too has lessons to be learned, both in terms of how it intervenes and also the extent of its interventions. As I said right at the start of this, I think in answer to the Chairman's point, I think there are questions that we have to ask ourselves in relation to the precise responsibilities, particularly at the interface of where the FSA and the Bank operate. I am pretty clear that firstly, I will not take anything away from the fact that the Chancellor of the day is responsible for whatever happens but I think what we do need to do is to make sure that both the FSA and the Bank have very clear responsibilities and that, if there is any dubiety or any uncertainty as to who is doing what, that we sort that out.

  Q831  Mr Love: You have talked on a couple of occasions, and in answer to this question you mentioned the interface. One of the things that the Bank has admitted to is perhaps poor communications between the Tripartite parties. Do you think that is solely responsible for the problems that arose or is it more than just communication that needs to be looked at?

  Mr Darling: Communication can always be improved. As I said in reply to an earlier question, I am not sure it was the Committee itself or the structure of the Committee that was the problem. We have to ask ourselves at each and every stage what are the problems that we need to try and fix? The problem I identify in relation to the Tripartite arrangements is that I think there does need to be some clarification as between what the Bank does and what the FSA does and the fact that there is inevitably an overlap between the two. The Bank of England is not responsible for the prudential supervision of individual banks. However, when a problem arises in any individual bank, it could have wider systemic implications. That is one of the things that we need to look at and obviously, the converse of that applies so far as the FSA is concerned. It is in that area, especially in relation to early warnings, because obviously what we are trying to do here is to stop this problem arising in the first place rather than intervening, that we need to look at closely. I shall not repeat it at length but the other problems too are the international problems and also the fact that every single director of every single financial institution should really be asking themselves "What is critical to my business and if it goes wrong what do I do about it?" If the answer is "I don't know," they should start thinking again very rapidly.

  Q832  Mr Love: Finally, when Northern Rock came before us they said the leak had made a big difference to the way this had all panned out but they also admitted that, even if there had not been a leak, they think they would have been difficulties in explaining this to the public. Can there be a role for just one authority speaking to the public at any time in relation to an issue like this? In other words, when you trigger the Tripartite arrangements, only one group should be speaking to them rather than all the different authorities?

  Mr Darling: I think most people who deposit money or do business with an institution want to hear from that institution as to what it is doing. Remember, a lot of the things that were happening lay within their control, and I certainly think the communications there could have been improved. Frankly, pushing a leaflet through a letterbox to people standing outside leaves an awful lot to be desired, and I certainly hope this does not happen again anywhere but it needs to be dealt with. I think also practical things like how you deal with people who come along asking for their money, other places in other parts of the world actually dealt with it a lot better than it was dealt with here. So communications are important. If your question is should that be done by the Bank of England, the FSA or the government, I will look at all these things and, if you have recommendations to make, I will certainly look at them but I think the first port of call, because so much is controlled by the actual bank—remember, this bank was solvent; it was a going concern. It still is. It is the one that primarily is responsible for communicating with what, after all, are its customers. They are not the Bank of England's customers.

  Q833  Mr Brady: It was clear that the Governor of the Bank's preference would have been to deal with this through a covert intervention, and he was very explicit when he came in front of the Committee that he felt his freedom to do that was hamstrung by four pieces of legislation. You on the other hand said that you are sceptical that you could have done this covertly, I think you said because of today's market conditions being very different, so nothing to do with the legislation. Can I take it you disagree with the Governor's assessment that it is legislation that hamstrung him and prevented that action from taking place?

  Mr Darling: I will say again to you what I said, I think, on the floor of the House, that I will look at the four pieces of legislation he was concerned about. One is the Market Abuse Directive, which is the disclosure of inside information. The other was the Takeover Code, which might, on one view, preclude something happening over the weekend. Then there is the insolvency legislation, which, I readily agree with him, is something that we need to look at, especially in relation to deposit protection. The fourth thing is the compensation scheme, which again, not only do I agree with him but we are already trying to resolve that. What I did say, and I said this on the floor of the House on 11 October, was that the issue before us prior to 13/14 September was not whether or not the Market Abuse Directive said that we could not do something. The issue was twofold. One is the directors were being advised that they had to make a profit warning and also my belief—and maybe because I am a politician I think of these things first—that someone is going to leak this and, as I say, sadly, I was right. I will look into all these things and if there is a problem with the Market Abuse Directive and it could be that there is a problem, that is clearly something we need to resolve but what I would say to you is, if there had been a realistic chance of rescuing this bank over a weekend, I would have done it and happily seen whoever was challenging us in court but that did not arise.

  Q834  Mr Brady: I recognise this is something you are still looking at but if there is a problem with the Market Abuse Directive, do you think that is more likely to have arisen in terms of obligations placed on the company in terms of disclosure, or on the Bank in terms of what it was able to do?

  Mr Darling: I think that Directive bites on both. It is basically designed to stop people from doing things and hiding the full extent of what they are doing to people that have a legitimate interest, like their shareholders but, like all these Directives, they do not just bite on the company concerned; I think they bite on other institutions and almost certainly public institutions as well. If it is a problem, we clearly need to deal with it. It is one of the things I will cover when I publish my proposals at the beginning of the year.

  Q835  Mr Brady: Finally, there is, I think, an exemption in the Market Abuse Directive that seeks to give greater freedom of movement to central banks. Do you believe that is adequate?

  Mr Darling: That is one of the things I have to look at but, as I said to you and I have said before, I do not think that was the fundamental problem that was facing us in the second week of September.

  Q836  John Thurso: Chancellor, the support given to Northern Rock gives the impression that no bank with retail depositors can be allowed to fail. Is that actually the case?

  Mr Darling: The position is as I set out in my statement of 11 October, which is that judgement has to be exercised as to whether or not the failure of an institution, no matter what sort of financial institution it is, would result in systemic damage to the financial system. It does not mean that we would intervene in every case. For example, the Bank did not intervene in relation to Barings in 1994.

  Q837  John Thurso: I do not think Barings had retail depositors.

  Mr Darling: No, it did not but a view had to be taken—obviously, I was not there at the time—as to whether or not the failure of that bank would have an adverse effect on the financial stability of the system.

  Q838  John Thurso: So the fact that the Northern Rock depositors are being protected on this occasion is because not protecting them would have rocked the system?

  Mr Darling: It is the system that we were concerned about. Mr Macpherson has just reminded me of course that BCCI did have retail depositors but the judgement was taken there that it would not cause the systemic problems that I believe would be caused this time.

  Q839  John Thurso: So, to be absolutely clear, the fact that it has happened on this occasion is not a precedent that any other institution should feel able to rely on?

  Mr Darling: Each case will be assessed on its merits.


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