Examination of Witnesses (Questions 1620
TUESDAY 18 DECEMBER 2007
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
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
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 likethey tend to move on the basis of relatively small
changes in interest ratesand 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
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
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
Mr King: That was late in 2006.
Q1634 Mr Fallon: So that was a year
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,
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.