Examination of Witnesses (Questions 1520
TUESDAY 11 DECEMBER 2007
Q1520 Mr Dunne: If Northern Rock
is nationalised, will Granite have to be nationalised too?
Sir Callum McCarthy: I am sorry,
it is a hypothetical question and I do not know the answer at
Mr Sants: Granite is, as you know,
an on-balance sheet vehicle in that sense. I know the obligations
which are carried by Northern Rock to Granite would have to be
carried through the nationalisation process, I would imagine.
Q1521 Mr Dunne: That would survive?
Events of default would not be triggered or it could be organised
so they did not trigger through a nationalisation, do you envisage?
Sir Callum McCarthy: It is difficult.
It would depend on the details of the Granite trust.
Mr Sants: It would depend. I have
a view, but I am hesitant to express a definitive view. I could
send you a note on it. I am pretty sure that it could be organised
in such a way, but I hesitate to be absolutely definitive.
Mr Dunne: If you could send a note, that
would be appreciated, Chairman.
Q1522 Mr Brady: When we took evidence
from Northern Rock it was not readily suggested that the first
contact specifically about the liquidity problems between the
FSA and Northern Rock was initiated by Northern Rock and not by
the FSA. I think, Mr Sants, you were interviewed for the File
on Four programme. You gave the opposite answer and said it
was the FSA that initiated that contact.
Mr Sants: Sorry, I have got a
very bad cold. I actually could not hear the question.
Q1523 Mr Brady: Who first contacted
whom regarding the liquidity problems at Northern Rock? Was it
the FSA contacting Northern Rock or vice versa?
Mr Sants: My understanding of
the eventsI think, as always in these things, it is a question
of how you perceive themfrom our point of view, we contacted
them first in the sense that, just to be clear, we always understood
the funding model of Northern Rock, as I think I have explained
before, so from the moment that market conditions deteriorated
and we set up our special process from 10 August and so forth,
if you remember the earlier discussion, we were proactively engaging
with the firms that we perceived as carrying risk and that includes
Northern Rock. Northern Rock may have been answering the question
in the sense that clearly, as the company, it would be their judgment
as to when they had a serious problem, so in that sense they might
have rung us and said, "We now do officially think we have
a serious problem", but from our perspective we were contacting
and proactive with Northern Rock as an at risk firm once market
conditions had deteriorated from 9 August. I believe, as I said
on the programme, that we were proactively engaging with Northern
Rock and that was the case.
Q1524 Mr Brady: That dated from 9
Mr Sants: I think from 10 August
Sir Callum McCarthy: Could I make
a distinction between after the events crystallised on 9 August
and before I think it would be a misleading impression to suggest
that the first time we had ever discussed liquidity, those issues,
stress testing, was 9 August.
Mr Sants: Yes, I did not think
that was the question. I think I made clear earlier that in July
we had already started to point out to the firm, recognising that
we could have been doing this before, that we were very unhappy
with their stress testing scenarios and asked them to do "further
distinct liquidity tests and scenario tests" and give greater
consideration to the impact of accelerated cash flows from a trigger
event in a liquidity crisis, so that communication was already
taking place with them in July and that was proactively initiated
Q1525 Mr Brady: What advice did the
FSA give to the Chancellor about the need for an immediate depositor
guarantee after the lender of last resort operation was leaked?
Sir Callum McCarthy: The announcement
was made on the Friday and, as you say, it was leaked on the Thursday
night. Over the weekend there was a series of conversations with
various Treasury officials and the Chancellor in which the need
to give an explicit government guarantee was discussed and the
decision was taken on the Monday afternoon.
Q1526 Mr Brady: What advice did you
Sir Callum McCarthy: The advice
was that if the run that was taking place continued, the only
way of stopping it was an explicit government guarantee.
Q1527 Mr Brady: Could I also then
ask about the advice that was given prior to the leak or the announcement
being made. The Governor has pointed out there was no easy way
to predict the response of the customer, but is it not really
common sense that in those circumstances without 100% guarantee
there would be a state of panic created?
Sir Callum McCarthy: No, I do
not think it was obvious. I think that a whole series of things
conspired. It was extremely unfortunate that the information leaked
because it meant that instead of this being put in place as, "This
is a solvent institution which has a cash flow problem and the
Government is stepping in to make sure that it is saved",
it became a panic measure or a response to something that was
already in the making. Panic was how it was seen. I think that
it was unfortunate that the administrative arrangements within
Northern Rock were not better developed, both in terms of the
Internet access which was inadequate and something which very
little could be done about at all, which was the physical layout
of the branches. One of the problems in these circumstances is
because of anti-money laundering requirements, if somebody comes
in and says, "I wish to withdraw £20,000", it takes
something like a quarter of an hour to go through all the necessary
steps. If you have a small branch with two counters, you only
need ten people and you have a queue. There was a whole series
of things that were difficult, some of which with more favourable
timing we could have overcome; some of which we could not. Also,
I think in retrospect it would have been better to have emphasised
the positive aspects rather than the negative aspects of lender
of last resort.
Q1528 Mr Brady: Did the FSA advise
the Chancellor that there should be the guarantee put in place
at the same time as the lender of last resort?
Sir Callum McCarthy: No, we did
not, nor did anybody else, nor would I have wished to have given
that advice because it would clearly have been better if the lender
of last resort facility had been put in place and had worked without
a general guarantee.
Q1529 Mr Brady: Again, I think I
am quoting correctly from the File on Four programme, Mr
Sants, on this subject you saidI think this refers to the
FSA and the Chancellor collectively"We obviously had
made the judgment that it wasn't an announcement we wanted to
make at the same time as the facility". That implies this
was at least discussed.
Mr Sants: To be fair, I think
this particular programme is an edited programme, not a live programme,
so I am not sure I can particularly recall the question to which
I was responding or, indeed, can be sure from the transcript what
the question was I was responding to. I was not involved in everyday
conversations with the Chancellor but I concur with the analysis
the Chairman has given. I do not think we specifically gave any
advice with regard to the 100% guarantee prior to the news breaking.
Q1530 Mr Brady: As you say, the programme
is edited but in the transcript I have got in front of me, your
actual words in response to this point were: "We certainly
discussed the possibility, but we obviously made the judgment
that it wasn't an announcement we wanted to make at the same time
as the facility", so it was the possibility of it.
Mr Sants: My recollection of the
discussions, I have to say these were not specifically with the
Chancellor, was that they were about alerting the FSCS i.e. we
were talking about the way in which this announcement would interact
with the compensation scheme. We were, of course, aware of the
limitations of the scheme and, indeed, as we said before in our
consultation paper, which was a precursor to the changes we have
announced, and the Chairman mentioned at the beginning, we made
clear the scheme was not structured to address a large scale failure
in the banking system. This is the point we had already made in
public. What I was seeking to reflect in that comment, I believe,
from memory, was the fact that we had been talking about those
issues, but we had not given specific advice as to whether the
matter should be addressed prior to the announcement.
Q1531 Mr Brady: You did not give
advice one way or the other?
Mr Sants: Not personally to my
recollection, none of us did.
Sir Callum McCarthy: My recollection
is that the question of the guarantee only arose after the queues
began to develop.
Q1532 Mr Brady: Yet it was discussed
Sir Callum McCarthy: Hector has
explained the context in which he made that remark.
Mr Sants: The compensation scheme
was discussed beforehand. The issue of 100% guarantee was certainly
not discussed at the principals' level. I think I may have some
vague recollection of it being mentioned by some working group
discussion, but that is the extent of it.
Q1533 Mr Brady: Do the Tripartite
Authorities have a communication strategy for coping with a bankrupt?
Sir Callum McCarthy: I would say
a better one now than we did some time ago.
Mr Sants: That was the point we
made when we were here before. We absolutely do think that there
are significant lessons to be learned in terms of the way the
Tripartite Authorities communicate around these types of issues,
both the terminology and the way we handle the release of the
news. We have already started to learn from those lessons and
continue to so do.
Q1534 Mr Brady: One final point.
If I could come back to Ms Minghella. How involved were you at
the time all of this was going on and how confident, in particular,
were you that the FSCS could cope with the failure of Northern
Rock had that happened?
Ms Minghella: We were not involved
in August with the discussions with the Tripartite Authorities
when they were going on. We became aware of the problems of Northern
Rock in particular in September. I think a point that has been
made earlier with Mr Todd was that we were not designed to deal
with a failure of this size, so it was not a surprise to us that
these discussions had been going on in advance of our being informed.
By the time we found out the lender of last resort facilities
were already in mind and that seemed to us to be appropriate in
Q1535 Jim Cousins: Sir Callum, if
a bank were to be nationalised, how would that affect the workings
of the tripartite committee?
Sir Callum McCarthy: I think that
it would depend on who was the owner of any nationalised bank
because we do not have responsibility for supervising the Bank
of England or any subsidiary of the Bank of England, so if an
institution became a subsidiary of the Bank of England, we would
not supervise it. If it were a freestanding, if I can use that
expression, nationalised bank, we would supervise it.
Q1536 Jim Cousins: Is this something
that has been discussed by the tripartite committee, how its own
workings would be affected in the event of the nationalisation
of a bank?
Sir Callum McCarthy: I am not
aware of any discussions. I have not taken part in any discussions.
I am not sure if there have been any.
Mr Sants: I am not aware of it
in the way I think you are asking. The Chairman has already answered
in terms of understanding the supervisory framework, but in terms
of the specific tripartite question, I am not aware of any discussions.
Q1537 Jim Cousins: You are obviously
aware, Sir Callum, that there is a campaign to downgrade the value
of the assets in Northern Rock and force it into nationalisation,
that campaign has been in front of the Committee this morning.
What regulatory consequences do you think there would be if one
of the members of the tripartite committee itself became the owner
of a bank?
Sir Callum McCarthy: Sorry, I
should make clear that I do not understand the reference to downgrading
Q1538 Jim Cousins: I am not suggesting
you have done that.
Sir Callum McCarthy: I am not
sure in terms of the tripartite arrangements if there were a nationalised
bank whether that would have very great effects on the tripartite
Q1539 Jim Cousins: If a nationalised
bank were to seek to wind up its operation rapidly by selling
its assets in the market in a short time frame, would that be
something that would come before the tripartite committee?
Sir Callum McCarthy: Were there
a nationalised bank, whoever was running that nationalised bank
would have responsibilities, it would have responsibilities presumably
under the Act of Parliament that had led to the nationalisation.
In terms of the FSA's regulatory responsibilities we would be
concerned, as with any institution, about systems and controls,
adequate management, all those things, but it would not be for
us because we would not be the shareholderthe shareholder
would be the Government in some form or otherto decide
on the commercial strategy of that institution.
1 Ev 227 Back