Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 1620 - 1639)

TUESDAY 18 DECEMBER 2007

MR MERVYN KING AND SIR JOHN GIEVE

  Q1620  Chairman: Surely somebody must have thought about that during that period.

  Mr King: Indeed, but that does not mean to say that it was inevitable that a bank run would occur. Let me ask John to talk about the deputies' discussions.

  Sir John Gieve: When we were planning the lender of last resort support we knew that it might not work and, if it did not, there would then be a choice between either, in a sense, guaranteeing all the deposits of the bank or, alternatively, allowing Northern Rock to go into administration. But we took the view that it was worth trying a classic lending operation first, because that offered the chance that Northern Rock would be able to get through the liquidity difficulties in the short-run and then resume normal operations after that.

  Mr King: Could I just add that one of the ways we hoped to deal with this was by having a covert operation. That might or might not have worked, but that was the reason we were arguing for a covert operation, and that was ruled out only on the Tuesday, two days before the Thursday of the decision.

  Q1621  Chairman: John, you say you were aware it might not work. We have got these missing four days, or these four days of inaction. Surely there had to be a bit of forward thinking in that.

  Sir John Gieve: Which four days are those?

  Q1622  Chairman: From the Thursday to the Monday, the emergency, when the Chancellor guaranteed everything. You are sitting down thinking this thing might not work because people are only getting 90% guaranteed. Why was that not done straightaway?

  Sir John Gieve: We did realise that offering a limited collateralised facility was not guaranteed to save Northern Rock. We hoped that it would restore confidence. I think that was a reasonable judgment at the time, and other people commenting on it at the time thought so too. But I think we did not do enough to reassure the retail depositors, and that became clear on the Friday. I think the deposit protection scheme was one element in that, but one feature of Northern Rock was that it had a large number of very big depositors who had deposits well above the 35,000, and those are always more slippery, if you like—they tend to move on the basis of relatively small changes in interest rates—and so even taking the measures we have subsequently taken on deposit insurance to make it 100% up to 35,000 would not have helped them.

  Q1623  Chairman: Governor, you mentioned the deficiencies in the system and the concerns you had for a number of years. Had you written to the Chancellor with your prescription for the way forward?

  Mr King: We had after the crisis management exercises involving the pricipals, the note, the record of that, and the standing committee deputies that followed it made it clear that all three Tripartite Authorities felt that an urgent work programme on how to resolve the problems of a failing bank was necessary, and that work was carried out.

  Q1624  Chairman: But did you as Governor write to the Chancellor?

  Mr King: I did not write to the Chancellor because there was no need. It was in the minute agreed by all three Tripartite Authorities.

  Q1625  Chairman: If you felt it was such a pressing need with four pieces of legislation required and the system never really worked, as I say, would it not have been wise to have written to the Chancellor and put your prescription for the way forward on record?

  Mr King: We did not want to force a prescription at a point when all three authorities agreed that measures needed to be taken to find a mechanism for resolving a failing bank and to improve deposit insurance. That was something which, it was agreed, the Treasury would work on. There was no dispute about that.

  Q1626  Chairman: Okay, we will follow that up. Governor, the issue of nationalisation has been mentioned, whether we are talking about nationalisation or public administration, or whatever. I had the opportunity to the speak to the FDIC last week in Washington and, as a result of that, I would ask you: what would your preferred process of nationalisation be if it took place? Would it be a long-term public sector commitment or something similar to what the FDIC has with the bridge bank authority where, if it took place under FDIC, Northern Rock would be immediately passed to private sector managers to run it, not by FDIC but private sector managers, so that it is prepared for sale? Can you envisage a system like this in the United Kingdom?

  Mr King: I certainly can, but I think it would require legislation to achieve it. That is the first point that I made. If we were to get to nationalisation (and I stress "if"), then I think it would be better if it could be used as a means of breaking the log-jam and going into an arrangement which would pass very quickly to a new management team and, ultimately, to a new ownership team. I do not see anyone is attracted by the idea of having on an indefinite—

  Q1627  Chairman: No, but you could have assisted them by identifying a management team.

  Mr King: Indeed.

  Q1628  Chairman: And you could pass the necessary legislation in the House of Commons to effect that change quickly?

  Mr King: You could indeed.

  Q1629  Chairman: Would that be a system which is worthy of consideration, do you think?

  Mr King: It is not a permanent system I would recommend. I think it is much better to have an equivalent of the FDIC with that ability to intervene early. This is now very late in the day. The right system to have had would have been one which would have intervened in the case of Northern Rock well before 9 August.

  Q1630  Chairman: But given our own Committee is looking at this issue, this is an issue which should be on the agenda, you think, in the future?

  Mr King: As I said, I do think that legislation to give the authorities the power to intervene early in the case of a failing bank is very important. Banks are not like other companies.

  Q1631  Chairman: So it should be on the agenda. The Government has said that it will wait for our report before finalising any legislative proposals for handling banks in distress. We hope to produce that by the mid to the end of January. Do you think the Government is correct to wait for that?

  Mr King: Yes; absolutely. Indeed, even that is rather a quick timetable. What matters is that we get the proposals right and we get the details sorted out, and, as I said to you when I came in September, I very much hope that the Treasury Committee will take the lead in all this because, in my view, this is something which deserves cross-party support. This not a party political issue, this is an issue in which, as I said, we are the only G7 country that does not have the power to deal with a failing bank in this way.

  Chairman: Okay. We hope to get that out by mid January. Michael.

  Q1632  Mr Fallon: Governor, just to be absolutely clear, it was as a result of the stress tests in 2005 that it was minuted that the improved legislative framework needed was now urgent?

  Mr King: 2005 was the deputies meeting and crisis management exercises. The principals, that is Sir Callum McCarthy, the Minister and myself, first got involved in the crisis management exercise in 2006, and at the end of that exercise Callum McCarthy, myself, Ed Balls as Government Minister and Treasury officials, all agreed that a key part of the future work programme was to work on these issues, and that programme was indeed put in place.

  Q1633  Mr Fallon: What was the date of that?

  Mr King: That was late in 2006.

  Q1634  Mr Fallon: So that was a year ago?

  Mr King: From now, yes, and work on this was indeed going on in the Treasury at the point when Northern Rock got into trouble and it seemed to be perfectly reasonable. I did not say to anyone, "You have to do this by the end of July otherwise we will not be able to deal with Northern Rock." No-one anticipated that, but the work was going on.

  Q1635  Mr Fallon: No, but it was identified as urgently needed a year ago?

  Mr King: It was important, yes.

  Q1636  Mr Fallon: You said "urgent" in answering the Chairman.

  Mr King: Yes, but that requires designing and thinking about legislation, and that is not a simple, straightforward matter.

  Q1637  Mr Fallon: So the Treasury has not been dragging its feet on that?

  Mr King: I do not believe it has been dragging its feet, no. I could perfectly well have written in June and said, "Look, what is going on with this?", and we asked about it, but I think this is a matter where it was important to persuade people, including you, to look at the experience of other countries and recognise that maybe this is one case where we can learn something from the rest of the world. But; to win opinion over and to get new legislation through is not an easy or quick matter and it may not be sensible to rush it. There did not seem at the time any obvious reason for this to be urgent in 2007 as opposed to 2008.

  Q1638  Mr Fallon: But it promotes the position now, without this legislation, that for any one of the ten big retail banks which ran into similar trouble to Northern Rock, the Treasury would have to do exactly the same, guarantee all the deposits all over again and, if necessary, underwrite a lender of last resort facility.

  Mr King: I very much hope we will not get into that position, but the reason and the need for new legislation and the reason I am stressing it now is that we do not have a means of dealing with this absent the new legislation.

  Q1639  Mr Fallon: The Sunday Times reported a senior bank official as saying that the Prime Minister and Chancellor were "unable to focus because morale throughout the Government is so low". Were you that senior bank official?

  Mr King: I can assure you, they are not my words and I do not share those views at all. I have meetings from time to time with senior economic commentators. One of those was, indeed, with Mr Stelzer, but the discussion was about economics. I explained to him how our money market operations worked. I am always trying to find people who do not understand how it works and point out to them how it does, and I explained to him the three points in my October speech, which, again, I mentioned this morning, but the conversation was about economics, not about politics. None of the comments in the article I recognise at all, and they are certainly neither my views or my words.


 
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