Examination of Witnesses (Questions 840
THURSDAY 25 OCTOBER 2007
MP, MR NICHOLAS
Q840 John Thurso: Earlier on in your
comments to one of my colleagues you described Northern Rock as
being hopelessly exposed and their business model as being extreme,
which I think everybody here would actually agree with today.
A year ago Northern Rock was seen by the City as being a highly
successful business with an excellent profit record and well worth
investing in. What is the lesson for the City to take out of this?
Do we actually have a problem with our understanding of risk generally?
Mr Darling: I think in general
terms I agree with a lot of what the Governor said in his speech
in Belfast a few days ago, and that is that he believes that all
institutions ought to carefully evaluate the risk to which they
are exposed. I have said before that regulators should concern
themselves not just with institutions that do not appear to be
doing terribly well but also with institutions that do appear
to be doing terribly well because, if they are out of line, it
may be they are doing a very good job but they ought to just be
sure that that is the case. What is going on in the world at the
moment is that people are re-pricing the risk and that is what
is causing the difficulty. As the Bank says in its report today,
and it is very evident from discussions I had with my fellow finance
ministers in Washington at the weekend, this process is still
going on all over the world and people do need to be far clearer
about what risks they are exposed to and what they have done to
lay off that risk by reducing it.
Q841 John Thurso: Just following
up on that last question, if I may, on lessons learned, I felt
when the board of Northern Rock came before us that the evidence
given by the Chairman of their Risk and Audit Committee indicated
that really, the bank itself had not looked at this risk and had
not really properly worked out what they would do, which is, I
think, very much what you are suggesting should happen. How do
we get this through to companies, that risk and audit committees
need to do more than tick boxes; they actually have to undertake
the spirit of what that corporate governance is meant to be about
rather than just the letter?
Mr Darling: I think in relation
to financial institutions that must be the job for the FSA because
it has to be a requirement on directors that they understand the
risks to which they are exposed, and in this particular case there
is nothing inherently wrong with having a risk as long as you
have that risk covered off in some way or you can mitigate that
risk. Nothing is risk-free. For example, other institutions that
used this model and used to borrow on the wholesale market either
also had banks with an investment arm so they had some other cover
or they had standby credit facilities. Countrywide is a case in
point. Northern Rock did not have that, and earlier this year
they quite aggressively pursued the mortgage market, it was very
dependent on getting a securitisation away at the beginning of
September, which in the event they could not because, just at
the time they needed to raise the money, the funds dried up.
Q842 Jim Cousins: Chancellor, the
guarantee going to depositors was rapidly effective in calming
the situation. Is there a time limit on that guarantee?
Mr Darling: We have asked the
Northern Rock bank to come back to us with its proposals by the
beginning of February and obviously, I am willing to review the
situation at that time. We do have a state aid issue in that,
as you know, there comes a point where the Commission will say
this is going on for too long. I am not sure that is an immediate
problem but I really want to get across to the bank that they
have a breathing space, if you like; they need to consider their
options; they have a new chairman now and they need to consider
what the best course of action is for the bank. That is their
decision, they are the directors, they own the company but we
have given them that breathing space and we have said to them
"Look, you need to come back by the beginning of February."
Q843 Mr Cousins: Of course the very
phrase "breathing space" which I do understand does
imply a time limit, but you have given the Committee this morning,
I think, a very clear assurance that if the time has to run further
than the beginning of February that would not necessarily be an
Mr Darling: No, we are not saying
it is a drop dead date. To take it to the extreme, if they said,
"Look, we will come back to you in 10 years' time" I
think there might be a problem.
Q844 Mr Cousins: Sure.
Mr Darling: I am reasonably confident
they will come back to us rather sooner than that. We have to
get state aid clearance for this sort of support and the state
aid rules are quite clear, you can do this sort of thing to provide
support in times of difficulty like Northern Rock but you cannot
do it in perpetuity. I said, when I did the statement in the House
a couple of weeks ago, I want to be as helpful as possible but
I am afraid the bank needs to play its part too now. I am encouraged
by the fact that perhaps with a new Chairman he will put a degree
of not just expertise but a degree of vigour into trying to sort
things out for them.
Q845 Mr Cousins: Have the European
Commission advised you of any timescale in which they think the
state aid restrictions would kick in?
Mr Maxwell: No they have not is
the short answer, but there are different ways in which you can
apply for state aid approval and some of those approvals have
certain time limits on them.
Q846 Mr Cousins: And they are?
Mr Maxwell: Restructuring Rescue
aid, for example, usually has initial limits around six months.
Mr Darling: Usually
Mr Maxwell: Usually it is very
much as has been discussed.
Q847 Mr Cousins: There has been no
specific instruction or advice from the European Commission that
there is a clock ticking and an end date?
Mr Darling: No.
Q848 Mr Cousins: Have the Tripartite
Authorities considered what they would do in the event of the
bankruptcy of Northern Rock?
Mr Darling: No because at the
moment that is not an issue. My concern would always be, in the
event of the bank being unable to find some way out, that we protect
the depositors. The opportunity is now there to make sure that
suitable arrangements can be made. I very much hope the directors
will use this opportunity to try and find a way to enable the
bank to carry on in one shape or form but that has to be a matter
for them at the end of the day.
Q849 Mr Cousins: Chancellor, just
to sum up. There is no drop dead dateto use your own phrase.
Mr Darling: Correct.
Q850 Mr Cousins: The Tripartite Committee
has not considered what action it would take in the event of Northern
Mr Darling: Because that issue
has not arisen. The FSA have always said, and continue to say,
that the bank is solvent. What you said in relation to the drop
dead rate is absolutely correct, however, since I dare say the
bank will follow these proceedings with great interest, that does
not mean that I do not regard it as being a matter of urgency
and I think a matter of weeks and months is what we are talking
about. They need to come forward with a proposal because self-evidently
they need to find a long-term solution for the problems they have
Mr Cousins: People in the North East,
Chancellor, will be grateful to you for what you have said this
Q851 Chairman: Finally on the Northern
Rock issue, when the Governor was here before us he told us that
he had sent you a letter on 13 September which gave advice on
further borrowing of Northern Rock and he would be happy for that
to be made public. I have written to you on that, could you give
us your comments on that, please?
Mr Darling: Yes. I have got your
letter and I have considered it carefully. I have looked again
at what the Governor said to me and what the Chairman of the FSA
said. For the record, they wrote recommending that I authorise
the provision of lender of last resort facilities. I do not believe
that it would be in the public interest to release these letters
at the moment. In particular the Chairman of the FSA is quite
clear that he wrote to me on a confidential basis and has made
it very clear that he would have concerns for the future if he
thought letters that he sent to me with his best advice were to
be made public, at least in the immediate vicinity of problems
arising and also having regard to the fact that the Northern Rock
position is not yet clarified. I do not believe that I can release
these letters. I am not saying that I cannot do so at some point
in the future but my judgmentand it has to be my judgment
on thisis that I do not think it would be in the public
interest to release these letters at the moment.
Q852 Chairman: So it is relating
to the immediate environment, maybe at a later date you will.
Mr Darling: I am happy to revisit
the position but I will have regard to two things. One is the
situation at the time a request is made but I also want to make
sure that in future, whether it is me or any other chancellors
in the future, that both the Governor and the Chairman of the
FSA can write to me in terms which are more than a formality,
that can actually be proper advice. Therefore, as in all these
things, of course they need to be looked at on their merits, but
that is the position, regrettably, that I find myself in at the
Chairman: Chancellor, can I thank you
for the first half of this session so we can release Mr Maxwell
but it is not goodbye, we will see you some time later. Thank
you very much.