Examination of Witnesses (Questions 820
THURSDAY 25 OCTOBER 2007
MP, MR NICHOLAS
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 agreedand
again, Clive Maxwell will set this out in further detailis
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.
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
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
Q825 Mr Mudie: You are sacked if
you say no!
Mr Darling: It is me I am thinking
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
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, officialsdeputies,
as they are calledattend 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
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
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
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 bankremember,
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
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 beliefand maybe because I am a politician
I think of these things firstthat 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
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
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 takenobviously, I was not there at the
timeas 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
Mr Darling: Each case will be
assessed on its merits.
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