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Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 840 - 852)



  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 obstacle.

  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 date—to 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 Rock's bankruptcy?

  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 got.

  Mr Cousins: People in the North East, Chancellor, will be grateful to you for what you have said this morning.

  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 judgment—and it has to be my judgment on this—is 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 moment.

  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.

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