Examination of Witnesses (Questions 1440
TUESDAY 11 DECEMBER 2007
Q1440 John Thurso: Can I just have
a go at your crystal ball? What failures do you see ahead next
year that you are going to be raising money for?
Ms Minghella: We are in the process
of preparing our forecasts for next year at present
Q1441 John Thurso: But you are forecasting
that there will be failures and you will raise money?
Ms Minghella: Yes, that is right,
based on our past experience and on the information available
to us at the time of the levy decision. If a failure were to occur
that was not in our forecast we would levy for it at the time,
and the industry would be obliged to pay our levy invoices within
John Thurso: That is such a wonderful
minefield of information that you have given us there that I do
not think the Chairman would let me prosecute all of the possibilities
Chairman: Try your best!
Q1442 John Thurso: One begins by
saying was Northern Rock in your forecast?
Ms Minghella: No, it was not.
Q1443 John Thurso: So what confidence
can I have in the forecasts you have got?
Ms Minghella: It is not bust;
it has not gone bust; and we only levy for firms that we believe
are likely to come our way for pay-out.
Q1444 John Thurso: Do you think anything
will go bust?
Ms Minghella: Based on our past
experience we can anticipate a number of failures. We have since
we took our power six years ago declared 1,800 firms in default
and, based on that pattern, we can foresee
Q1445 John Thurso: But none of those
are major deposit holding banks?
Ms Minghella: Absolutely not,
no. In the deposit taking area we have only had 29 credit union
failures, and that is it, and they are small.
Q1446 John Thurso: In your forecasts
do you forecast that any major deposit taking institutions are
up to fail?
Ms Minghella: Not at present,
Q1447 John Thurso: So in fact, if
you come down to the major banks and the principal secondary banking
institutions, you are not forecasting any failures and therefore
you are not going to be raising any funds, in fact?
Ms Minghella: Not in advance,
that is right, so we levy according to need, and should the need
arise mid-year we would levy at that point.
Q1448 John Thurso: Thank you for
that. One of the problems with the protection system or the reasons
why it has to exist is that if a bank is put into administration
the depositors become creditors in line with ordinary law and,
as a result, they are unsecured and therefore take their chances
following what the receiver or administrator will do, whereas
that is a politically unacceptable situation and therefore governments
step in and have schemes. Is there any merit in considering changing
the legal status of depositors such that they are in a secured
creditor position so that it changes the balance of moral hazard?
Sir Callum McCarthy: Clearly the
Government could, if it wished, change insolvency law. You would
have to be very careful in approaching those changes because it
would also change the relative attractiveness of advancing money
in other ways for the funding of banks, and before making a particular
change it is very important to consider the overall effect on
the banking system.
Q1449 John Thurso: The fundamental
point here is that the banking system in virtually every country
depends on the fact that governments will not allow banks to fail
and will therefore have some form of scheme or rescue always in
place, so what the banking industry are asking us to do is to
publicly underwrite that. If you change the structure of the law,
you put that cost and that responsibility back on to the banking
system earlier in the process. Does that not have some merit?
Sir Callum McCarthy: I would point
out that it is not the case that all banks in all circumstances
have been saved. I can understand the merit of the argument but
I also think it has to be weighed carefully with the continuing
need to make banks attractive as institutions to either invest
in or to lend to.
Q1450 John Thurso: The Governor of
the Bank of England admitted that our system for dealing with
insolvency of banks and depositor insurance is markedly inferior
to all other countries. What changes could we make in particular
to the release of depositor funds in the event of a bank failure
that we could learn from other countries.
Sir Callum McCarthy: I would not
agree with that statement in comparison with "all" other
countries; I am not sure if the Governor intended it as such.
Q1451 John Thurso: I think he was
selecting his countries.
Sir Callum McCarthy: I think there
are certainly things we can learn from the US experience where
they have the ability to deal with a failure rapidly and in a
way which enables them to take powers to deal with a failing bank.
Q1452 John Thurso: So you would share
John Bovenzi's view that, had the UK had a system rather like
the US model of depositor protection, the Northern Rock crisis
could have been avoided in the UK?
Sir Callum McCarthy: It would
have undoubtedly been of real help in preventing the retail run.
Q1453 John Thurso: The final question,
if I may, and it really goes back to what I was touching on, is
this. If we had had an effective depositor protection scheme and
a more suitable insolvency regime in place at the time, would
the Tripartite Authorities simply have allowed Northern Rock to
fail? And maybe I should not ask the question "would"
they have, but "could" they have? Would it have been
Sir Callum McCarthy: I honestly
do not know, I am sorry. I understand the question but I am not
sure if I can deal with the hypothetical circumstances. The issues
that would have been involved would have been serious and I do
not know the answer, is the only truthful answer I can give.
Q1454 John Thurso: I am probably
asking you to speculate, then, but do you think there are any
banks that are simply too big to rescue?
Sir Callum McCarthy: No. If you
look at those instances where there have been very big banking
failures, the Swedish experience, for example, people have been
rescued on a very large scale. Going back to the other question,
just thinking about it in terms of the US experience, I do not
think the answer is self-evident, that if you had a deposit insurance
and the insolvency regime you have in America it necessarily makes
it easier to take a decision not to save institutions. I think
it is still a difficult decision.
Mr Sants: Indeed you could argue
it might have been the converse because, taking your earlier point
that the Tripartite would have been more confident that there
would not be a run on the Bank then the cost of saving it would
probably have been estimated to be less, but it is obviously a
finely balanced call.
Q1455 Chairman: What constraints
does the Deposit Guarantee Schemes Directive, Sir Callum, impose
on the design and operation of the UK scheme? For example, would
a US style system be permissible here if so desired?
Sir Callum McCarthy: My understanding
is that it represents minimum levels, and does not constrain us.
Q1456 Chairman: Are any changes afoot
on the European Commission's Deposit Guarantee Scheme Directive
that you are aware of?
Sir Callum McCarthy: Not that
I am aware of, no.
Q1457 Chairman: How should the UK
deposit insurance system deal with the issues of home versus host
Ms Minghella: The way it works
now is that if a UK deposit institution were to fail it would
be for the UK as a home state to look after the depositors, not
only the depositors in the UK but the depositors of any EEA branch,
and if a EU bank from overseas passports into the UK, it is for
the home state of that EU bank to look after the depositors and
for us only to become involved if the bank has topped up into
the UK scheme, which a number of banks have done. That is basically
the way it works under the Directive.
Q1458 Chairman: Sir Callum, the Chancellor
assured this Committee that the 100% guarantee given by the Government
to the depositors of Northern Rock did not extend to any other
institution; rather "each case will be assessed on its merits".
How credible is that assurance?
Sir Callum McCarthy: I see no
reason to doubt it, Chairman. It was a statement made to you seriously
by the Chancellor.
Q1459 Chairman: So it is 100% credible?
Sir Callum McCarthy: I absolutely
believe that the Chancellor meant what he said.