Examination of Witnesses (Questions 1780
THURSDAY 10 JANUARY 2008
MP, MR JOHN
Q1780 Peter Viggers: In October,
Chancellor, you told this Committee that you fully expected to
get back the money lent to Northern Rock. Do you remain as confident
now, although state guarantees extend to about half the total
liabilities of Northern Rock?
Mr Darling: Yes, one of my objectives
is to make sure we do get our money back. When we reach a conclusion,
whatever that conclusion is, one of the priorities, in addition
to protecting depositors, is to make sure that we get our money
Q1781 Peter Viggers: Well, you are
aiming to, but are you confident you will?
Mr Darling: Yes, I very much hope
we do, as I said in October.
Q1782 Peter Viggers: Professor Willem
Buiter characterised state support for Northern Rock as "open-ended
breastfeeding". To what extent were you in control of the
way in which public financial exposure has extended since September
and to what extent were you carried along by events?
Mr Darling: I am aware of Professor
Buiter's view and I think, put shortly, he takes the view that
we should have let Northern Rock go under. That is what I think
he said fairly consistently at the time. I disagree with that.
Again, as I said to you last October and since, the reason that
we decided to offer lender of last resort facilities was because
we believed that there was a wider systemic risk to the financial
system. Now, that is the only consideration and that has always
been the case as far as lender of last resort facilities are concerned,
and I believed there was a serious risk of contagion and, therefore,
we offered that support. Having offered that support, we need
to see that through. Over the last few weeks, we have been working
intensively by giving the company breathing space to try and reach
a solution and I hope we will be able to do that, but I think
it was the right thing to do and I do not agree with Professor
Buiter's analysis which of course starts from the proposition
that we should have let the bank go under.
Q1783 Peter Viggers: The interest
premium reflecting government support for the Bank of England
lending facility to be paid ultimately to the Treasury has been
rolled up and subordinated as tier two debt. Why did you accept
this lower status for amounts and what are the implications of
Mr Kingman: Well, we took that
decision in the context of our wider aim which is to create a
period in which there is stability for the bank. The position
you describe is correct, that is to say, the premium over and
above base rate is rolled up. The amount involved is not gigantic
in the context of the sums involved in Northern Rock, it is well
under £100 million in the period that we have given that
Q1784 Peter Viggers: You made your
advances and guarantees to a company which was controlled by a
board whose model had completely failed. What steps did you take
to ensure that the company acted in accordance with your wishes?
What guarantees and controls did you take over the company?
Mr Darling: Firstly, the money
that has been advanced has been advanced against the security
of the company's collateral, but you raise a point which brings
me back to the first point I made in response to Mr McFall's point
about why I think the FSA need greater powers and that is this:
that the company is owned by its shareholders and the shareholders
appoint the directors, the Government does not appoint the directors,
but, when you get to a situation like this where you offer support
for the good of the financial system on behalf of the public,
I think there does need to be the availability of powers to the
Government to take greater control, and that is what I am proposing
with the reforms which I shall publish later this month. At the
moment, the problem we have got is that the company is owned by
its shareholders and the directors are answerable in law to the
shareholders, so the security that we have got is either in terms
of security over the company's assets or that we lend money in
terms of premiums and other guarantees.
Mr Kingman: I would just add that
we have, as you would expect, lent rather a large sum of money
to this bank and taken very significant loan protections, as you
would expect in this sort of situation, which means that a whole
variety of commercial decisions they have to take require the
authorities' agreement. That is obviously not a fantastically
sustainable way to run the business and any solution will have
to protect our interests in an ongoing way, but allow genuine
Q1785 Peter Viggers: Did you use
your leverage of the advance of money as fully as you could have
done? The Board was left, for instance, with the opportunity to
declare a dividend or indeed to declare bonuses, so why did you
not use your leverage as lenders?
Mr Darling: Well, I think, if
I remember rightly, they thought again about the question of issuing
a dividend, but the position is, as I have said, we have lent
money and we have explained the security of the Bank of England
and, therefore, ultimately the Government has, but you are right,
we do not run this company. I think that one of the things that
is unsatisfactory at the moment is that, when you get into a situation
like this, we do not have all the levers at our control that we
would like, hence my proposals for a restructuring facility with
the FSA so that, were we to get into the situation again, we could
at a far earlier stage say, "Look, support is coming"
or provide support where, without having to pass special legislation
or use the insolvency laws which are quite complex and were actually
not designed for a situation like this, we can actually take the
powers that we need. At the moment, the Board is there, it is
answerable to its shareholders and it is not the Government's
Board, if you like.
Q1786 Peter Viggers: To some, it
has seemed that the Treasury has been flat-footed and carried
along by events in the last six months. Could that be connected
in any way with the fact that you had a completely new ministerial
team in the summer and that scarcely anyone in the Treasury has
more than ten years' experience going back beyond 1997 of Treasury
Mr Darling: The only point I would
agree with you is that unfortunately neither the Treasury nor
anybody else has that much experience of banks getting into these
sorts of difficulties. You are right, that in the early 1990s
there were some difficulties. We have had BCCI, we have had Johnson
Matthey and we have had Barings, but that was a long time ago
and we have been fortunate that, until last year, we had not had
the sort of experience we have had with Northern Rock. In relation
to Northern Rock, and we need to keep sight of this, the difficulty
that Northern Rock got into was primarily the responsibility of
that company which had a business model that was completely exposed
when the money markets dried up. I think it was three-quarters
of their lending depended on them being able to get access to
the wholesale markets, and that is what the problem was. In relation
to the action that we took subsequently when Northern Rock got
into difficulty, as soon as it was clear that it was not going
to be able to achieve funding, we took action immediately to put
in place lender of last resort facilities and, since that time,
what we have been doing is trying to find a solution. As I said
to Mr McFall, I would like to find a private sector solution,
if that is at all possible, but that may not be possible at the
end of the day because, whilst the conditions in the money markets
are now much better than they were before Christmas, it is still
a challenging time, but I hope we can find that solution and I
will do my level best to do that. However, given the current economic
conditions which are unusual, it is not surprising that a solution
that might have been available had this happened two or three
years ago is not immediately available just now. You cannot look
at what is happening to Northern Rock in isolation from what is
going on in the general markets at the moment and, as you know
better than many, the conditions in the markets at the moment
are very difficult right across the world.
Q1787 Mr Fallon: Chancellor, in underwriting
the rest, almost all now, of Northern Rock's balance sheet just
before Christmas, you have given the taxpayer almost all the liabilities,
but no control at all over the assets. That is the position, is
it not, that you have got no control over the bank's expenditure
and its current activity?
Mr Darling: We have issued it
a guarantee because it is the logic of what we were doing in the
first place and, as I say, we are working towards a solution and
part of that solution will include the return of the money that
was lent by the Bank of England.
Q1788 Mr Fallon: Is it true that
securitisation designed by your advisers, Goldman Sachs, to securitise
the taxpayers' lending would then have to be guaranteed itself,
triple A, by the Government?
Mr Darling: Well, Goldman Sachs,
as you know, have been hired by the Treasury to advise us last
autumn and just before Christmas we said that we had asked them
to look at funding options. Those discussions are continuing and
we have not come to a concluded view. I did not hear it myself,
but I think there was a speculative piece on the BBC this morning,
but all I can tell the Committee is that we are looking at all
of the options available, I very much want to find a private sector
solution, if I can, and, when I have got something to report,
I will report to the House in the way that I have done.
Q1789 Mr Fallon: Under which of these
options would the level of taxpayer support start to fall significantly
Mr Darling: We have not reached
a preferred option yet. We are still having discussions and we
have had intensive discussions over the last few weeks with Goldman
Sachs as well as with the company and with the prospective bidders
and, as I say, when we have a proposal, then we will come to the
House and set it out.
Q1790 Mr Fallon: Chancellor, this
has been going on for four months now. It is four months since
you bailed out this bank. You have committed over £25 billion
of taxpayers' money with no guarantee that we will get all of
it back, no timetable for repayment and no clear outcome in sight
for the Northern Rock Board or the people who work for it. Is
it not the position here that you have got neither a policy nor
Mr Darling: The position is that
we are operating in extremely difficult circumstances, the markets
are subject to huge uncertainty and, as you will know, on a couple
of occasions this autumn it has been quite clear that many institutions
have found it difficult to borrow and to lend, so these are not
normal conditions. It is not surprising, therefore, that, whereas
a couple of years ago Northern Rock might have got into difficulties
and then fairly quickly somebody would have come along and said,
"Okay, we'll take it", that has not happened because
these are not normal conditions. What I have endeavoured to do
over the last few months is to make sure that, having intervened,
we see that through and we try and reach a solution. Now, I agree
with you that we will reach a stage, and I said last October that
I was going to give the company until the middle of February to
come back with proposals and we are reaching a stage where we
are going to have to reach a conclusion one way or another, but
I will defend to the hilt what we have done over the last few
months because I think it was the right thing to do and indeed
at the time it was widely supported, although I quite accept that
some of those who supported it at the time are now running away
from the support they once gave us.
Q1791 Mr Fallon: If the bank has
to be nationalised in the end, are we guaranteed to get all of
our money back?
Mr Darling: As I said earlier
on, one of our objectives is to get our money back.
Q1792 Mr Fallon: All of our money?
Mr Darling: Yes, to get all of
our money back. That has always been my position, and I also said
in the House of Commons last October that we would do that at
an appropriate time, but our intention is to make sure that we
get the money back. That must be the basis on which we proceed.
Q1793 Mr Fallon: You have changed
Mr Darling: No, I have not.
Q1794 Mr Fallon: You have said it
is a hope, an objective and now you have said it is an intention.
Is it a guarantee that we will get it back?
Mr Darling: What I have said on
many occasions is that I intend to ensure that we get our money
back, and that is what I have said. I may have used a different
formulation, but it adds up to the same thing, no matter how much
you want to play with words, Mr Fallon.
Mr Kingman: It is worth remembering,
and I think it is a point John Gieve mentioned in his evidence
to you, that this bank has positive net assets, in fact significant
positive net assets. It is assessed by the FSA not only as being
solvent in a balance sheet sense, but also meeting the FSA's capital
requirements. So there is, on the assessment of the FSA, significant
positive value in this bank.
Q1795 Mr Breed: Right at the beginning
of the session, Chancellor, you indicated that part of the new
legislation you are thinking about would include powers for the
FSA to seek or obtain information from banks as part of their
supervisory regulation. What information can they not currently
get under their existing powers that you are going to give them
new powers to get?
Mr Darling: I will ask Clive to
comment on this in a bit more detail, but I think what we need
to do is to have better visibility of what institutions are doing
re arrangements for looking after the depositors, the systems
they may have if they need to pay money out and also to get information
and, having got information, to be able to talk to the Bank of
England about it because, as you know, there can be difficulties
if I get information from you for a perfectly good reason and
I cannot then pass it on to somebody else, another supervisor
in this case because you are talking about the Bank of England,
so it is to clarify the law in some cases where the FSA say there
are gaps there, but also to make sure that we have got the information
we need when the appropriate circumstances arise so that we can
take prompt action.
Mr Maxwell: To give an example
of an area where I think the FSA feels that the information it
has been getting from banks has not covered everything that it
would like would be around liquidity risk. In publishing its discussion
paper in December, it set that out as one of the issues it wants
to tackle and it can do some of that through its rule changes
and we will also look at legislative changes, if they are necessary,
to facilitate it doing that.
Q1796 Mr Breed: So for ten years
or so they have not felt the necessity to have information concerning
the liquidity of banks?
Mr Maxwell: They have had information
about liquidity, but it has been around a different sort of liquidity
regime, around the sterling stock regime which was a different
sort of regime. I think there is a widespread recognition across
most countries in the world that liquidity regulation needs to
change and that has been looked at internationally by the Basle
Committee and in Europe, and the FSA will need to make sure it
gets more updated information, more rapid information about liquidity
as part of implementing a regime like that.
Q1797 Mr Breed: Well, either they
did not understand it or they did not consider it important enough.
Mr Darling: I think it is true
to say, as Clive has just been saying, that it is relatively recently
that regulators are beginning to focus on the fact that liquidity
is just as important as capital adequacy. Again, I said this when
I spoke to you last October, one part of the work that we are
doing at the international level for financial stability and the
IMF is to make sure that regulators focus on the liquidity problems
because this is unusual, the present difficulty across the world.
Previous people have been driven because people did not have enough
capital, but the problem we have got just now, ironically in many
cases, is that there is plenty of capital now, but it is just
frozen, it is a liquidity problem, so I think the answer to your
question is that 10 years ago, if you had said, "What's the
big problem?", people were really focused on capital adequacy
rather than on the whole question of liquidity.
Q1798 Mr Breed: The Governor of the
Bank of England told us, "At present, we cannot allow a bank
to fail unless it is clearly insolvent", and the BBA commented
that, "it is difficult to envisage the UK authorities allowing
the failure of a retail deposit-taker", but does that not
fly in the face of the usual sort of thinking in the financial
markets that banks actually must be allowed to fail?
Mr Darling: The test that we apply,
and this has always been the case as far as the Bank of England
was concerned under the present Governor and previous governors,
is that, if it failed, would it have an adverse effect on the
viability of the financial system. It is the systemic risk that
you look at rather than any other factor. If you look back at
the banks that went down in the 1990s, Barings, the consideration
there was that it was not a retail bank. It had some retail deposits,
but it mostly was not, therefore, it was not going to affect the
system generally. BCCI went down for reasons that were nothing
to do with the financial system in general, but the way in which
that bank was operated, as we well know. Looking further back,
there were banks that failed before that in the 1970s and Johnson
Matthey in the 1980s, so the test is whether it will affect the
wider financial system, and that is what we need to look at.
Q1799 Mr Breed: But, with the depositors
secured or looked after, why was there the necessity then to protect
the shareholders and others in respect of any potential failure
of Northern Rock?
Mr Darling: We are not protecting
shareholders and, as I said earlier on, shareholders know that,
when they buy shares in general, they can go up and they can go