UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 999-iv

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

TREASURY COMMITTEE

 

 

Financial Stability and Transparency

 

 

Thursday 25 October 2007

RT HON MR ALISTAIR DARLING MP, MR NICHOLAS MACPHERSON, MR MARK NEALE, MR CLIVE MAXWELL and MR RICHARD HUGHES

Evidence heard in Public Questions 747-852

 

 

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Oral Evidence

Taken before the Treasury Committee

on Thursday 25 October 2007

Members present

Rt Hon John McFall, in the Chair

Mr Graham Brady

Mr Colin Breed

Jim Cousins

Mr Philip Dunne

Mr Michael Fallon

Ms Sally Keeble

Mr Andrew Love

Mr George Mudie

Mr Sin Simon

John Thurso

Mr Mark Todd

________________

Witnesses: Rt Hon Mr Alistair Darling MP, Chancellor of the Exchequer, Mr Nicholas Macpherson, Permanent Secretary to the Treasury, Mr Mark Neale, Managing Director, Budget, Tax and Welfare, Mr Richard Hughes, Team Leader, Comprehensive Spending Review, Treasury, and Mr Clive Maxwell, Director, Financial Services, Treasury, gave evidence.

Q747 Chairman: Chancellor, good morning and welcome to the Committee. As you know, we are taking this session in two parts, the first on the issue of financial stability and transparency, which we hope to spend the first three-quarters of an hour or so on, and then on the issue of the PBR and the CSR. On financial stability and transparency, we will be hearing from you again in January, at the conclusion of our inquiry, and it would be good if you could confirm in advance of your final report on deposit protection and other related banking issues that this would fit in with your timetable.

Mr Darling: Yes, it would.

Q748 Chairman: Thank you. Could you please introduce yourself and your colleagues.

Mr Darling: I can confirm I am the Chancellor. With me there is Clive Maxwell, who is the Director of Financial Services and, with your permission, after we have finished the first part of the meeting, he will withdraw since he is solely concerned with that area. Nick Macpherson, the Permanent Secretary, you know, as do you know Mark Neale, who is the Managing Director for Tax and Welfare and Richard Hughes, who is in charge of the Comprehensive Spending Review.

Q749 Chairman: Thank you very much and welcome. Considering that we have had the first bank run in the United Kingdom for about 140 years, how successfully do you think the tripartite authorities have handled this situation?

Mr Darling: There are certainly lessons to be learned. My starting point is this, that what happened in the second part of August and early September was very dramatic. It started in the United States; it rapidly spread from there to the rest of the world and affected us here in Britain. The fundamental problem was that, whilst there was plenty of capital available, the banks and other financial institutions became very reluctant to lend to each other and there was an acute shortage of liquidity. That affected Northern Rock in particular because of its particular business model. It had aggressively expanded its market share earlier this year and was very dependent on being able to get hold of wholesale funding on a very regular basis and it became clear from the middle of August onwards that it was finding it increasingly difficult to do so. When that became apparent to the authorities in the middle of August, they did a number of things. Firstly, the FSA worked intensively with the Northern Rock bank to try and resolve its liquidity problems by helping it get access to more money, helping it with the securitisation that it had planned and which it depended upon. It also had discussions with, I think, two institutions which showed some interest in acquiring either part or all of it but of course, unfortunately, these did not materialise and, as you know, Northern Rock found it progressively more difficult to get funds even at a price that it was prepared to pay and eventually it had to come to the Bank of England for specific support. Obviously, I am happy to go into further details there as you want but my view of this is that fundamentally the structure we have in this country, where you have the Financial Services Authority which is responsible for the prudential supervision of individual institutions, is right. We have the Bank of England which is responsible for the stability of the financial system. I would take a great deal of persuading that you should merge these two. I think that would be very problematic and certainly I do not think anyone would argue we should go back to where we were ten years ago when we had seven or eight different regulators. I think there are lessons to be learned in relation to the interface between the Bank and the FSA. Both of those institutions, the FSA when they came to see you a couple of weeks ago, and the Bank of England in its Financial Stability Report which it published this morning, recognize that there are lessons to be learned in the way that we dealt with this in this country as well as there being international lessons of course as well.

Q750 Chairman: We will be having both the Bank of England and the FSA before us again before your report, Chancellor. The Northern Rock run started on 14 September but the announcement to the changes in the depositor protection scheme for Northern Rock customers was only announced on 17 September. Why was there a delay in recognizing that additional action was required?

Mr Darling: If we go back to the night of the 13th, that is, the Thursday night before the announcement was made, you will recall that I think it started to appear in the early evening news bulletins on the BBC that Northern Rock had sought facilities. Our intention was to make a statement, in common with market practice, at seven o'clock the next morning. The reason for that is the directors of Northern Rock had, understandably, decided they had to issue a profits warning and that it would have been disingenuous not to have mentioned that they were going to the Bank of England for facilities but the stories started to appear in the BBC and, of course, the queues started to appear outside some Northern Rock branches the next day. I frankly do not think that the issue of a guarantee or the extent of the cover under the depositors' scheme was an issue on Friday. It suddenly became an issue over the weekend, which is why I decided that we would put a guarantee in place on the Monday. Guarantees, as you know, are by no means unproblematic and, as you have seen with Northern Rock over the last few weeks, the nature and extent of the guarantee is quite a complicated thing. I think the issue of a guarantee or people's concern about whether or not they could get all of their money out did not really become an issue until over the weekend. Frankly, on the Friday - and indeed, it has been the case ever since - people could always get their money out of the bank, as they can today if they want to do it, but I think I was very clear by the weekend that, unless I went further than what I had been saying from Friday through to Sunday, and said, to put the matter beyond all doubt, "We will guarantee the retail and also the wholesale deposits", their problem would have continued but the guarantee itself was not an issue on the Friday morning when those queues started to build up.

Q751 Mr Fallon: Chancellor, when did you personally first hear that Northern Rock might be in trouble?

Mr Darling: On 15 August.

Q752 Mr Fallon: So four weeks before the bank run. In this tripartite system that you and Mr Brown designed, of Governor, Financial Services Authority and Chancellor, who was in overall charge?

Mr Darling: In terms of the tripartite committee?

Q753 Mr Fallon: Who was in overall charge?

Mr Darling: Ultimately it is the Chancellor. As I said in the House of Commons a couple of weeks ago, I am pretty clear about that. There are discrete responsibilities. As I said, the FSA on prudential supervision and the Bank in relation to financial stability through its market interventions, but the whole point of having a committee is to allow all three institutions - because the Treasury is the backstop, if you like, in all these things - to be intimately involved. I said that I was first told specifically of Northern Rock on 13 August; a great deal of work was being done by the FSA and the Bank between the 15th and the time that ultimately Northern Rock had to come for specific lender of last resort facilities.

Q754 Mr Fallon: But for a month the three of you could not agree on the safe haven option, you could not agree on a covert rescue operation, and when the bank run started, you then took four days to put in place proper saver protection.

Mr Darling: No, none of that is true. Firstly, in relation to what happened during that month, as the Governor told you when he appeared before the Committee, whilst we were told there were concerns about Northern Rock at the first tripartite committee on the 14th and, as I said, the Treasury and I were formally told on the 15th, at that stage it was by no means certain that all was up with the bank. Northern Rock was able to get finance; it was finding it progressively more difficult but initially it was able to get access to finance. That is why the FSA, as they have said in a memorandum to you, were working closely with the Northern Rock bank to see whether or not they could help the securitisation, they could help get additional funds. On 29 August the Chairman of the Financial Services Authority, Callum McCarthy, wrote to me formally drawing my attention to the fact that he thought Northern Rock then had quite real problems. I think it was the following Monday that the tripartite committee, the Governor, the Chairman and myself, met. We agreed two things. One is that, because of the systemic importance of maintaining Northern Rock, we would have to support that bank but, in addition, it was agreed that where it might be appropriate, generalised support to the whole market would be made, and indeed a couple of days later, the Bank of England did put 4 billion into the system. I just want to emphasise to you that during that four-week period there was a great deal going on. The problem was that by the beginning of September it was widely known in the market that Northern Rock was very exposed and they were willing to pay to get the facilities but they were simply drying up. In relation to the covert support, the safe haven point, by which I presume you mean another company, there was one slight expression of interest from an institution but that never came to anything. There was one more specific interest, although after two or three days that went away as well, although they did reappear after the bank had got facilities. In relation to covert support, we were clear from the time it became pretty certain that Northern Rock had severe problems that, if necessary, it would be able to get lender of last resort facilities. The problem was - and I said this in the House last week - that that I was always very sceptical whether or not you could do this covertly simply because today's market conditions are very different.

Q755 Mr Fallon: OK, but looking at the system as a whole that you put in place to protect us against this kind of fiasco, the plain fact is that you were told on 14 August by Northern Rock that they were going to run out of money.

Mr Darling: No, that is not true.

Q756 Mr Fallon: Through a triangle of indecision and dithering, four weeks later they did run out of money.

Mr Darling: Northern Rock did not say on 14 August "We are going to run out of money." What happened was the FSA said on 14 August it believed that, because of Northern Rock's particular business model, because of its exposure, it was the concerned about it in general. That problem began to crystallise at the end of August, when it was clear that this was not just a generalised worry or a suspicion but that actually Northern Rock was running into quite substantial problems. As I said to you, during that period prior to the end of August and after that until the middle of September, extensive efforts were made to try and resolve the problem with Northern Rock. Remember, Northern Rock is and remains the property of its shareholders and it is run by its directors. We were trying to work with them to try and resolve this position because as time went on we became increasingly concerned about that. In relation to the general problem that we faced, I said right at the start that I think there are lessons to be learned, both in terms of the regulation, because if you look at Northern Rock, look at the exposure it had and realise just how dependent it was on being able to get funds on a daily basis, if that line of funding dried up, as it did, what was its fallback position? The answer in Northern Rock's case is that they did not have a fallback position. Other institutions like Countrywide in the United States did have standby credit lines to banks. Northern Rock did not appear to have that sort of safeguard. Work was being done but I am in no doubt that in relation to what we need to learn from this, firstly, I have mentioned I think internationally the surveillance. We have international institutions which could be used far more effectively, and that is something that we started work on when we met in Washington last weekend. In relation to the position domestically, the FSA have said, and it is right, that they do need to look at their procedures and how they regulate things. The Bank of England has said today that, having regard to what happened over that period in August and September, it too needs to ask itself how it would intervene, whether in a general sense or a particular sense, because it does worry me; I think central banks do need to be able to intervene in ways that sometimes, in the public interest, are not overt.

Q757 Mr Fallon: The FSA and the Bank have admitted their responsibilities, their failures. Why will you not admit yours? You are in charge of the system. This is the first bank run for 150 years. You failed.

Mr Darling: As I said to you right at the start of this session, I accept responsibility for what happens at the tripartite committee. The Chancellor ultimately is responsible for these matters. I said the same thing in the House of Commons last week. I am very clear about that. What I want to do though is to make sure that we learn from what has happened here. I think there are changes that need to be made, particularly in the interface between the Bank and the FSA. There are changes too that we need to make in relation to the deposit protection scheme, which is perhaps the third point that you mentioned in relation to the guarantee because much better than a guarantee in future would be a system that would allow us immediately, in the event of a bank failing, to isolate the depositors' funds and pay them out as quickly as you reasonably can. Therefore there would be absolutely no reason whatsoever for a depositor with Northern Rock to be concerned about whether or not their money was safe. As you know, we are consulting on that now.

Chairman: That is one aspect we will be actively looking at in our inquiry.

Q758 Mr Simon: When I asked Sir Callum McCarthy do you think the tripartite arrangements work, which is hardly a trick question, he said, "I think that they do work. Each of us has discharged responsibilities." He did not actually add "admirably" but that was definitely his attitude. Everybody who has been here has told us that the tripartite arrangements worked and it has all gone fine, and yet we had a run on the bank. There is a huge reality gap which is baffling us all.

Mr Darling: Firstly, I do not think, as you rightly say, anyone has used the word "admirably" or anything like that. My starting point, as I said to Mr Fallon a short while ago, is that I think having the FSA responsible for prudential supervision and the Bank of England responsible for the general stability of the market is the right model, and it is a model that most countries in the world are moving towards. The tripartite committee is simply a mechanism for bringing those three things together but when you ask was it able to stop Northern Rock seeking funds, no, it was not, but I think it would be wrong in your analysis to say that if only the tripartite committee was different or it had functioned differently, this would not have happened. The big problem was the fact that liquidity dried up following the failure of the sub-prime market in the United States. That problem affected America, it affected the Far East, it affected Europe, there were problems in Germany, some in France, as well as a problem with a particular bank here. In deciding what we do next, we have to be clear about what the problem was in the first place and I do not think it was the structure of the committee that was the problem.

Q759 Mr Simon: Is it the problem that the structure of the committee was not sufficiently able to respond to the changing needs of a fast-moving situation, was not sufficiently dynamically responsive to a crisis, and that a new structure needs to be thought of which is more responsive to these kinds of extreme pressures?

Mr Darling: You can always improve structures and you can always make changes but before you do, you need to work out what the problem was in the first place. The general problem was the fact that liquidity dried up. The next problem was that you were dealing with an institution, Northern Rock, which was hopelessly exposed. Let us deal with those two problems first of all. One is a generalised problem. I think there needs to be better international surveillance, there needs to be better regulation to stop banks from hiding things off-balance-sheet, and there needs to be questions asked on the precise role of what credit rating agencies do. There are all sorts of things you need to do there. The second thing in relation to Northern Rock, I am quite clear that regulators need to start looking far more at liquidity and not just solvency. They tend to be more concerned about solvency. Northern Rock is and was solvent and it is unusual. Mr McFall was asking about banks in the past. BCCI, for example, was insolvent; Barings became insolvent. With this bank that was not the problem; it was the fact that you could not get ready cash. In relation to how the bank and the FSA and ourselves react to those things, yes, there are lessons to be learned. I think the FSA needs to have more visibility of what the consequences might be on an institution like Northern Rock on the wider system and, as the Governor himself has said in the report published by the Bank of England this morning, the Bank of England needs to focus more on what happens if a particular institution gets into trouble on the wider stability of the system.

Q760 Mr Simon: Exactly, which the Bank has done this morning but the FSA certainly still has not done. I understand that the best way to solve these problems is to deal with the root causes and the core conditions and make sure that they do not occur again. The question still remains, if you find yourself in a crisis like this, are the structures and the institutions which consist of all the key actors able to withstand and to respond to the pressure? We still have Hector McCarthy telling us each of us has discharged our responsibilities and the structures worked. Plainly, they do not work.

Mr Darling: It is Hector Sants, I think, and Callum McCarthy.

Q761 Mr Simon: They are as bad as each other.

Mr Darling: I know you have created a hybrid but I think they might take exception to that.

Q762 Mr Simon: I took exception to them, I can tell you.

Mr Darling: I am very clear. This is ultimately my responsibility to make sure that the FSA firstly, is properly equipped to do its job and secondly, it is very clear what the extent of its job is and where the boundaries are. Equally, it is my responsibility ultimately to make sure the Bank also makes improvements. I said this to the Commons the other day: I have asked the FSA to let me have its proposals by the beginning of the year and the Bank of England is doing similar work at the moment. Thereafter I intend to publish my proposals, fitting in with your own timetable. I would find it useful to get your observations on these things before I publish the Government's proposals, which I understand, given the timetable that I think you are working to, would be perfectly possible but the answer to your comment, Mr Simon, is that I think there is always room for improvement. It would be nonsense to suggest that you could not improve the present situation. I think we can but I think we need to be very clear what problem it is we are trying to fix.

Q763 Mr Dunne: Chancellor, just in response to Mr Simon you said that the big problem was liquidity and that it had been identified and alerted to you that there was a liquidity problem in the markets early in August, at the beginning of this process. As you have accepted that you have responsibility as lender of last resort, the Bank of England is not independent in this context. What were you advising the Bank of England to do in response to the obvious liquidity problem?

Mr Darling: The position is that the Bank of England would provide lender of last resort facilities but you are right that I have to authorise it, because ultimately the Treasury might have to guarantee that or it might have to support the Bank in doing so. The procedure is that the Governor and the Chairman of the FSA would recommend, as they did, that support to me. In relation to your other point, as I said, I think in reply to Mr Fallon, when at the beginning of September it was pretty clear that whatever Northern Rock was trying to do, it did not look like it was going to work, we discussed both general support in the market and I think it was a couple of days after that, probably the 4th or 5th, that the Bank of England put about 4 billion into the market but we also agreed right at the start that, because of the importance to the stability of the financial system, the systemic importance, we would have to support Northern Rock as an institution.

Q764 Mr Dunne: Can I take you back to the 4 billion? You identified earlier that this problem was a global problem and was affecting markets in the United States, in Europe and in the Far East. The central banks in those jurisdictions were providing liquidity into the markets in August, not on 4th or 5th September. You have not addressed my question as to what advice you and the Treasury were giving to the Bank of England to respond to this situation, which was global.

Mr Darling: We discussed this on a number of occasions and the Governor's view was very firmly that it would be very difficult to get sufficient money into the hands of Northern Rock without putting... Bear in mind that, as of about a week ago, they told the committee they have had to borrow about 13 or 14 billion from the Bank. To get that sort of money into the hands of one institution you would have to put many more billions of pounds into the market generally. Given that the problem was not lack of capital but was instead particular problems of liquidity for Northern Rock, the Governor's very firm view was that that was not the right thing to do. Notwithstanding that, as I say, on 4 August, in an attempt to try and free things up and to encourage banks to start lending to each other, the Bank of England did provide that support.

Q765 Mr Dunne: I think that was 4 September.

Mr Darling: That is right.

Q766 Mr Dunne: You said 4 August, I think.

Mr Darling: I am sorry; I meant September.

Q767 Mr Dunne: Had the Bank acted in August in a modest way and shown a signal that it was prepared to provide liquidity to the system, we might not have got into this problem.

Mr Darling: I think it is impossible to say whether or not that would be the position.

Q768 Mr Dunne: This is what the ECB did and what the Fed did and they have not had a run on a bank.

Mr Darling: Both in America and in Europe banks have got into difficulties.

Q769 Mr Dunne: But they have been able to handle it in a covert way, and we have not.

Mr Darling: It certainly was not covert, either what the ECB did or what the Fed did.

Q770 Mr Dunne: But banks applying for facilities to the Fed and the ECB have been able to do so without it becoming public.

Mr Darling: I think the difference is that in the United States they did make money available. It did not stop three or four institutions from... I think in fact three or four institutions have actually had to close down in the United States and have been taken over by other banks. In Europe some of the smaller German banks got into difficulties. So it is not just a problem for here. There are two things I would say to you. One is we did have these discussions. Money was put in, as I say, at the beginning of September.

Q771 Mr Dunne: Too late.

Mr Darling: No, I am not aware of any evidence that we have that would demonstrate that had it been done a week or two weeks earlier, that would have sorted out Northern Rock's problem. The problem is Northern Rock would have had to have got this money itself. The other banks, especially the larger ones, were sitting on these things. The other thing I would say is if you look now, two months later, it is interesting that, although the Fed and the ECB and the Bank of England here took different positions, the overnight interbank rates are pretty close to each other, despite the fact that they took very different approaches.

Q772 Mr Dunne: Northern Rock top management told us that had they thought about it early enough, they could have used the ECB facility through their Irish subsidiary. We have seen other UK banks now taking out multi-billion-dollar facilities with the Fed, or so it has been reported, in order to give themselves back-up lines. If we had a different system applying in this country similar to either in the US or in the ECB, surely this situation could have been avoided?

Mr Darling: There is always going to be an argument as to whether you should have general intervention or specific intervention. One of the things that the Bank of England has said in today's report is that it clearly needs to look at that as a result of what has happened. You are asking me what discussions took place. The Governor, whose primary responsibility it is - one of the two core functions of the Bank is to maintain the financial stability of the system - was very firmly of the view, as he told you when he appeared here two or three weeks ago, and on other occasions too, was firmly of the view that he was not convinced he would be able to get sufficient money into the hands of Northern Rock, and it was into those hands that money needed to go.

Q773 Mr Dunne: I have a specific question on the timing of the Northern Rock situation, if I may. You have told us that it became public knowledge, as we know, on the evening of 13 September. Where were you on 14 September?

Mr Darling: I was in London.

Q774 Mr Dunne: Were you not at the ECOFIN meeting?

Mr Darling: That was later that day.

Q775 Mr Dunne: Do you think it was advisable to go outside the country when we were in the midst of the first run on a bank crisis we have had for 140 years?

Mr Darling: Two things. Firstly, I was in London in the morning. I think I left about 10 o'clock. The reason I went with the Governor was because at that meeting I wanted to get European agreement to start looking at some of the difficulties we had internationally, to look at what we might do within Europe itself, and subsequently there has been agreement that we need to do more. Frankly, Portugal is not the end of the world; it is possible to receive information and issue instructions from there, which I did, and I was back in London later that evening.

Q776 Mr Dunne: Over that weekend you have just told us you changed your view about whether there should be a bank deposit guarantee.

Mr Darling: Yes.

Q777 Mr Dunne: When did you first start receiving advice that this might be necessary?

Mr Darling: We discussed it on a number of occasions. The first time that I think the tripartite committee, the three of us, agreed it would have to be done was on the Sunday morning when we met.

Q778 Mr Dunne: When was the Bank giving you advice that it was something you ought to consider? Did you have advice prior to the Sunday?

Mr Darling: On the Sunday it was the Bank's very firm view that unless we did something on the guarantee, the problems were going to subsist and it is one that I agreed with. My recollection is that it was raised with me in more general terms prior to that but I would need to check to be absolutely precise. As I said to Mr Fallon right at the start, I do not think the absence of the type of guarantee that I announced on the Monday was the problem on the Friday morning. I think the problem on the Friday morning was that, when you think about it, people were sitting at home, they saw on their television that a fairly well-known bank in this country was going to the Bank of England for facilities and therefore a fairly large number of people went down to Northern Rock the next day to get their money out. It was really over the weekend that especially a lot of comment in the newspapers and on television about just how much money is guaranteed that the guarantee really came into play. As I say, guarantees themselves are difficult. As you can see just now, I have given a guarantee which is giving Northern Rock the breathing space that it needs but none of these things are problematic. I was quite clear by Monday that it was necessary to go further than what had been said over the weekend and issue that guarantee.

Q779 Mr Dunne: Did you get advice from Number 10 Downing Street on Sunday?

Mr Darling: No. I have said on many occasions in the last ten years, I am in regular contact with the Prime Minister for all sorts of reasons but no advice was issued on that point.

Q780 Mr Breed: Chancellor, earlier on in the meeting you said that you first became aware at the beginning of August of the problems with Northern Rock, yet we were told by the FSA that they were concerned much earlier in the year, had issued a warning about the business model, and indeed, had even put them under close supervision. Are you saying that the tripartite authorities had not been advised by the FSA of their concerns over Northern Rock and that the first time they issued that to the other parties was the beginning of August?

Mr Darling: I think 14 August was the first time that the FSA formally said when looking at this problem - and remember, I think the week before, when problems had arisen in France, people started focusing on these things. On the 14th, which I think was a Monday, was the first time they said, "We think Northern Rock might have a problem." You are right that the FSA and I suppose more generally the Governor of the Bank of England have raised concern about these things. The only observation I would make is that, whilst there has been generalised concern expressed about this aspect of the banking system, I do not think anybody expected a complete freezing of liquidity which, as far as I am aware, is completely unprecedented in modern times.

Q781 Mr Breed: But two members of the tripartite authority were concerned and they did not bother to tell the third part.

Mr Darling: I think in the normal course of events what the FSA and what the banks say is publicly available. I do not think they were keeping it from anybody. It was a more generalised concern. I think what was unforeseeable when you think about it is this: people start to default on their mortgages in one or two American states; within days it spreads throughout the United States and then across the world. I do not think that had been foreseen before.

Q782 Mr Breed: Chancellor, you have been talking about the problems of debt and the problems that some banks may have for quite some time. This was obviously in the context of a background where there were concerns for a long time, yet apparently the tripartite authorities did not actually have a formal note from everybody all together until some months after the FSA and the Bank of England had expressed concerns about the whole situation. How could it be said that the tripartite authorities are actually working in any meaningful sense between about May and August?

Mr Darling: Firstly, you mentioned debt. I am not sure whether you mean corporate or personal debt.

Q783 Mr Breed: Both.

Mr Darling: That actually was not the problem which confronted us in August. The problem that confronted us was whilst the institutions right across the world had lots of money, they simply stopped lending to each other. That is what was unusual in the present situation and that particular set of circumstances was not specifically envisaged by the FSA or anybody else this year. What the FSA were saying is that in relation to one or two institutions - and I think they had had discussions with Northern Rock, as you might expect, about these things - they had a more generalised concern. This is one of the things, and as I said to you, questions do have to be asked in relation to the regulator, the FSA, and all of us. When you get a general concern, how quickly do you move from dealing with that general concern to actually saying, "Look, here are half a dozen things you ought to be doing"?

Q784 Mr Breed: In hindsight, would you have preferred that they had actually raised it with you before 14 August?

Mr Darling: Hindsight is a wonderful thing.

Q785 Mr Breed: I agree with that. Would it have been preferable for them to have alerted you before 14 August?

Mr Darling: In hindsight, it would have been much better, would it not, if the FSA when first looking at Northern Rock had said, "Hold on, what exactly is your fallback position?" and when Northern Rock said, "We haven't got one" they did something about it?

Q786 Mr Breed: Do you think the tripartite authorities should have all been aware of the concerns of at least two of them on one particular institution?

Mr Darling: They were not expressing concern about one institution at the beginning of the year.

Q787 Mr Breed: You just said that they were both expressing concerns about Northern Rock.

Mr Darling: The Bank of England expressed a general concern. I think it was a speech the Governor gave at the beginning of this year. The FSA had been talking to Northern Rock and suggesting it did some stress-testing of its systems. When you think about it, at the moment the FSA regulates hundreds of institutions. Some of those concerns they will raise, they will deal with and they will never come back and trouble anyone again. They have to exercise a judgement as to whether or not there is a particular concern that is so great, that is not going to be resolved, that then leads to a systemic problem.

Q788 Mr Breed: So their judgement was lacking in this particular case. Can I just turn very quickly to the possibility of the so-called safe harbour or safe haven, the other bid? You seemed to indicate that in fact there was not a substantial bid ever being able to be considered by the bank or anything else?

Mr Darling: That is right.

Q789 Mr Breed: Mr Applegarth, the Chief Executive of Northern Rock, said to us that had a facility been granted to the bank, "I am led to believe that we would have had a good to consider and I suspect that, had an offer been made with a big retail brand, then the run would not have taken place."

Mr Darling: I assume you are quoting from him when he said "I am led to believe." It sounds as if the thing was rather contingent but my understanding of what happened is this. There were actually two institutions. One showed a slight interest but it never really progressed further than a general inquiry. There was a second interest which was raised with the FSA and at one point they asked what would we do if they asked for support - and it was very substantial support; it could have been as much as 30 billion - to be given at commercial rates by the Bank of England. Our initial reaction was twofold. One is that the Bank of England does not normally provide, in effect, investment help for a perfectly viable bank. The second point is that there would also be a state aid issue, I think. The third one is, if we were going to do this, we would almost certainly have to say to banks at large, "If we are making this facility available, who else might be interested in that?" However, in the event the matter was not pursued.

Q790 Mr Breed: In that event, do you believe the tripartite authority should be only reactive or do you believe they should in these circumstances be more proactive?

Mr Darling: No, I think they should be and they were proactive. I said earlier on that the FSA, discharging its duty, was looking to see who might be willing to acquire part or all of this business, who might be able to help Northern Rock out. It was not for the want of trying. It was as this situation developed. The market is a pretty small place; people knew Northern Rock had problems and, whilst there was an interest earlier on, as I have just been talking about, the fact that that particular institution, after I think it was two or three days said "No thanks" perhaps indicates the problem that we were up against. The ideal solution - and I was very clear about this - right from the time that I first became aware of this would be, if Northern Rock could either be acquired, merged with or find another institution, because that would have been by far the best option. If that had come along and we were able to help in respect of that, then of course we would have done so. The difficulty was that, as the days went by, it was increasingly obvious that people just did not want to know. That was the problem.

Q791 Mr Todd: The stories the BBC ran led to the queues forming outside Northern Rock and, obviously, the bank was completely unprepared for that event and had not prepared any communication strategy to tell its customers. Have you conducted any leak inquiry into where that leak may have come from?

Mr Darling: No, and I suspect, having had some experience of leak inquiries, it would be as successful as every other leak inquiry that has ever been held. It is of course open to you, if you wish, to summon people to ask them how it might have happened.

Q792 Mr Todd: It clearly was not in Northern Rock's interest to disclose this information.

Mr Darling: I do not have the powers to summon anyone that I might suspect and pin them against a wall and demand they tell me but it was clearly very unhelpful and whoever did it, he or she has not paid the price but others have. In relation to the more general point, again, in retrospect, I think Northern Rock could have perhaps managed those queues better than they did. The fact that there are only four branches in London and the fact that they are used to dealing with a very small number of people each day means you do not have to have too many people coming into the place before you get the queues out of the front door.

Q793 Mr Todd: Indeed, one of their problems was the rather small number of depositors they had.

Mr Darling: I think I am right in saying they have about 70 branches in the whole of the country and there are only four in London.

Q794 Mr Todd: Do you think that one of the difficulties was that Northern Rock would have had to have disclosed anyway that they were receiving lender of last resort backing because this would have led to a profit warning? Is there some merit in looking at whether, in these very specific circumstances, some greater confidentiality might be applied, or do we just have to live with the transparency and accept the consequences?

Mr Darling: I think that is a very good point and it is one that affects not just the central bank here but across the world. I was very clear from the beginning of that week that, whatever happened, it would almost certainly leak because that is the way of things, not necessarily from someone doing it quite maliciously but what was happening in the days before that is that people were phoning up banks saying "Have you been to the Bank of England?" Of course, the people who had not, were anxious to say "No, no, never in a month of Sundays" and gradually... It is rather like, as MPs, we are well aware of the journalists' round robin on a Friday afternoon: "Have you or do you know anyone who ever has?" and the minute you do not say anything, they finger you because you do not deny it. This is a problem. On top of that, in relation to Northern Rock, their legal advisers, as I understand, had told them they would have to issue a profits warning, not surprisingly, and they were also, I think, given advice that, given the fact they had gone to the Bank of England or were about to go to the Bank of England, they would have to disclose that. The choice is whether you try and do that in an orderly manner, and the only thing I was wrong about the leak was the timing of it, but it is a problem. As I said to Mr Fallon, if central banks are to do their job, there will be times when they need to do things without people being aware of it for the greater public interest.

Q795 Mr Todd: There is one other possible framework, which is that the lender of last resort facility could have been put in place rather more rapidly than it was, giving less time for a leak to occur. Northern Rock have claimed that it took some time to put this in place; they had a plan to communicate to their customers about it; that was foreclosed by the leak that took place. Another approach, as I said, would be to concertina that negotiating process into a much narrower period.

Mr Darling: We actually did it quite quickly. As I said before, it is the directors who are running the bank and they did not actually come to the Bank of England and say, "Look, we actually now need facilities" until the week in question, and once they had agreed to come, there was no problem whatsoever. It was not like filling out a form for a personal loan or anything like that. They were able to get the facilities when they wanted them.

Q796 Mr Todd: They say they kicked off on 10 September and they were intending to announce a week later, which I must admit gives a huge opportunity for a leak.

Mr Darling: My recollection is they did want a longer period but I think two things went against that. Firstly, it would have been astonishing if you could have kept that quiet for a week. Secondly, their own legal advisers - and directors have fiduciary duties. This bank was trading. They had to issue a profits warning because the last profits forecast they had made had turned out to be wildly optimistic and they have had to suspend payment of a dividend in the meantime. The profits warning requirement drove that as much as anything else but my understanding is they would have had some difficulty issuing a profit warning without mentioning the fact that they were also seeking facilities from the Bank. These are things we really do need do need to look at. We cannot have a situation where you can only provide support at such a cost that nobody is actually going to take it. That flies in the face of the whole concept of lender of last resort.

Mr Macpherson: Further evidence of the difficulty of keeping these things secret is provided by the general liquidity facility which was available through August. You will recall that one clearing bank had access to it. It was supposed to be secret but it was in the newspapers the next day with a subsequent effect on the share price. It is really, really difficult.

Mr Darling: Can I just say for the sake of clarity that the reason that bank got the facility is not because it was in trouble but simply it was squaring its books at the end of the day. This is the point I was making, that people did a phone round and only one person said "I can't comment."

Chairman: In fact, the chief executive said it was awash with cash.

Q797 Ms Keeble: Just to wrap up this last point, do you not think there is a fair point that, if people have their money in a bank and it is in difficulties of the type that Northern Rock was in, actually people are quite entitled to know what should happen about it and what the prospects are for it having to go to the Bank for a facility?

Mr Darling: I thought you were going to make a separate point about the deposit protection scheme, which I think we are probably agreed on. I can understand the point that you make in relation to that but I think there are times where if something can be done to tide over a bank that might be in difficulty, that maintains its position and, importantly, the position of the whole banking system, then that is justified. I would be reluctant to get myself into a situation that if you had to make a public announcement every time you did anything, you might actually make a difficult situation that much worse. I certainly would not want to see queues outside every bank as a matter of routine. The banking system is hugely important to us and I think it is probably far better that we can do things... It depends on the circumstances bit I think sometimes covert operations can be very much in the public interest.

Q798 Ms Keeble: Can we move on to the tripartite authority and the Treasury's role on it? You did say previously that you had only known in August about the problems with Northern Rock but both the FSA and the Bank had both talked in general about being aware of the general problems, which I am sure you were as well. I wondered if you had done any scenario planning in the Treasury as to what the implications might be of the fall-out of the sub-prime market problems in the US.

Mr Darling: There are two things. Firstly, you are right that there was a generalised awareness of the problem but certainly not about specific institutions and certainly not about Northern Rock. I think the existence of and the consequences of people lending in the sub‑prime market really only came to people's notice probably in about July. In relation to stress testing, the Treasury has carried out exercises. If you do not mind, I will ask Nick; it was before I came to the Treasury. It did actually carry out a stress test earlier this year but that was in relation to a slightly different scenario. It was more of a terrorist-based one.

Q799 Ms Keeble: Could we have a note on it, because I have some other questions.

Mr Darling: Yes, if you want to have a note on it, I will happily do that.

Q800 Ms Keeble: That would be helpful. Do you have a named official who takes the lead responsibility in relation to the tripartite authority, and who is that?

Mr Darling: Yes. Here he is.

Mr Maxwell: I take part in meetings of the tripartite committee and Stephen Pickford, my Managing Director, is also involved in doing that.

Q801 Ms Keeble: You have maintained that consistently all through the crisis?

Mr Maxwell: We have cover. We ensure we have senior staff cover involving us and Nick as well and other senior staff whenever necessary.

Q802 Ms Keeble: One of the comments that you made earlier, Chancellor, was that you heard about one thing, I think it might have been the decision to go for the facility, in the evening and you were told formally the next day. I did wonder about the lines of communication. Presumably, they are acted on immediately and you do not wait for a formal notification of something.

Mr Darling: No, and in the normal course of events, as a Minister, and particularly as the senior Minister, your officials keep you informed as and when they hear things. I knew from what I was picking up generally the week before; you could see that there were problems but no-one mentioned any specific company to me and certainly on the Monday when the tripartite committee met, they were aware of it, and the Treasury was aware of this. What happened was the FSA actually rang up - I cannot remember whether it was you or Stephen Pickford - the next day and actually said, "Look, there is a problem here."

Q803 Ms Keeble: What are your relations now with the board? Do you have a tripartite authority official on the board of Northern Rock?

Mr Darling: No.

Q804 Ms Keeble: Were you consulted about the appointment of the new chairman?

Mr Darling: In relation to your first question, no, we most certainly do not. It is very clear that the directors are accountable to the shareholders and neither the Government nor the Bank of England nor the FSA are on the board. In relation to the new Chairman, Bryan Sanderson, yes, I knew about it but that decision was taken by the board; in particular the senior director, Ian Gibson, was anxious that the board should be beefed up but that was his decision. It really is most important, as I said in the House the other day, the Government can help but the Government does not own this company. This company has to sort out its affairs.

Q805 Ms Keeble: But you have put a large amount of public money at its... You have given a large amount of support to the institution.

Mr Darling: Yes, and therefore we are working closely with the company but we do not have somebody on the board. This company is owned by its shareholders and it is the directors that are responsible for it, not the institutions or the Government.

Q806 Ms Keeble: You also said that there was going to be action over the credit ratings agency. I just wondered what progress you have made on that.

Mr Darling: This is something that has to be done internationally, as well as in Europe and here as well. I think the questions that really need to be asked are firstly, what precisely people believe their role to be, because a lot of institutions give the impression that if the credit ratings agency says something triple A, that is fine and they do not make any further inquiries. I am pretty clear that credit rating agencies are there as simply one particular avenue of advice and that first and foremost, the responsibility for maintaining the financial security of an institution must lie with its directors. I am very clear about that. The way in which credit agencies operate is something that I think we need to look at because it has some bearing on what regulators require of individual institution institutions when they take advice and the way in which they satisfy themselves as to whether or not they are doing the right thing.

Q807 Chairman: Chancellor, on the issue of Treasury staffing for financial stability, following up Sally's question, I wonder if you could send us a note on that because that is something of interest to us?

Mr Darling: On who it is or what?

Chairman: Treasury staffing of the financial stability department. That would be of interest.

Q808 Mr Mudie: Chancellor, when the sub-prime issue arose in the States, the Fed and the ECB took policy decisions on putting liquidity into the market. The Bank of England took the opposite stance. Who took that decision? Was it solely the Bank of England or did they consult you and did you have a say in that policy decision?

Mr Darling: As I was saying to Mr Dunne---

Q809 Mr Mudie: No, he asked but I hope I am not getting the same answer. I am asking you specifically who took the policy decision not to put liquidity in the market in early August.

Mr Darling: The decision was taken by the Governor but having spoken to me about it. I thought that is what I said to Mr Dunne.

Q810 Mr Mudie: When I asked you in the House you said "I have many discussions."

Mr Darling: I do, yes.

Q811 Mr Mudie: Of course you do. Were you asked, consulted, or was he advising you of the decision? We just need to know who took this decision?

Mr Darling: He discussed it with me and I said what his belief was. We had a number of discussions about it but that was his firm view. I can be very clear about it: he took the decision but he consulted me and I will back the Governor.

Q812 Mr Mudie: No, but he took the decision, and you will loyally back him. That is fine.

Mr Darling: He is responsible for maintaining the financial stability of the system but he does need to talk to me, as he needs to talk to Callum McCarthy. I have explained what his views were.

Q813 Mr Mudie: Your loyalty is heartening. Let us take the one you do accept responsibility for, the chairmanship of the tripartite committee. You seemed to downplay the Lloyds TSB approach. You see, Mr Applegarth told us that they were negotiating until 10 September but he got a final decision from the central bank that they would not agree Lloyds' terms, which were that the same facility of 30 billion that was going to Northern Rock be transferred to them, plus they did not like the rate of interest. Are Northern Rock telling us the truth?

Mr Darling: Mr Applegarth, if he is saying that we reached... We were not at a stage where here was a formal offer with hundreds of conditions and the only one that could not be sorted out was this. This was a general enquiry from an institution who were looking at possibly acquiring it. They did not come to us and say, "Look, if we do this, we require a loan of this and these terms and conditions."

Q814 Mr Mudie: Loyally again, we could not get the FSA, who seemed to be the conduit to the tripartite committee---

Mr Darling: I think they raised it with them.

Q815 Mr Mudie: As Mr Maxwell was saying, who handled from the tripartite committee, who was the liaison point with Northern Rock over these very sensitive negotiations that could have given a market solution that would have saved all this problem?

Mr Maxwell: In most cases during that period the contact with Northern Rock was carried out by the FSA, its supervisor, and that is where the direct line of responsibility is.

Q816 Mr Mudie: The FSA did say they took a position, a request, to the tripartite committee. Northern Rock say this was on the 10th and those were the terms. I notice the Governor of the Bank of England says it was not a facility; it was a subsidy. It was the same facility that was awarded to Northern Rock three days later.

Mr Darling: No, it was not at all.

Q817 Mr Mudie: You tell me. Plus interest rates.

Mr Darling: Can I deal with that, Mr Mudie? Firstly, I noticed that Callum McCarthy said to your Committee "I think it would be incorrect to regard the solution as being a firm cut and dried offer. It was still at an exploratory stage and there were a number of other issues which had to be dealt with," which is in terms what I was saying to Mr Dunne. What happened, as I understand it - and Clive Maxwell will add to this if he thinks it is appropriate - is that the issue was raised with the FSA when, as you would expect, they were looking round an institution like this, they were looking at all sorts of possibilities, they said, "What would happen if we asked you for" - it was not a firm prospect - "up to 30 billion from the Bank of England at commercial rates, in other words, not penalty rates or anything like that?" So in effect, the Bank of England would be providing the same sort of help as an investment bank might do for maybe up to two years and for quite a significant sum of money at prevailing commercial rates.

Q818 Mr Mudie: What was the amount they were asking for?

Mr Darling: I think it was up to 30 billion.

Q819 Mr Mudie: What was the amount you agreed with Northern Rock?

Mr Darling: The lender of last resort.

Q820 Mr Mudie: When they got the facility that they still have, and they have now borrowed up to 16 billion of it, what was the total amount?

Mr Darling: I will come on to that in just a moment but there is a world of difference between providing public funds at commercial rates to a bank that was a going concern---

Q821 Mr Mudie: No, no, Chancellor. Rates we will come to and I understand that but it is the facility.

Mr Darling: The facility that this possible bidder was asking for was to a commercially viable going concern. It was entirely different to Northern Rock, which by the time it asked for lender of last resort was in a much more difficult position, and the lender of last resort facilities, as Northern Rock have said, they have drawn about 13 or 14 billion from that, that---

Q822 Mr Mudie: What is the total you have agreed with them?

Mr Darling: What we have agreed - and again, Clive Maxwell will set this out in further detail - is that they have that facility but it is secured against collateral. We have also guaranteed various deposits but of course, we fully expect to be able to get that money back.

Q823 Mr Mudie: Why will you not tell us the facility? Is it 30 billion?

Mr Darling: I can. I can tell you what it is. The terms of the guarantee have been set out, I have written to both the Chairman of this Committee, so you should all have the terms and details of it, as well as the PAC see in the normal way, so you can see what the terms are. Because the money has not been drawn out of the bank, it has not actually cost us anything yet and I am confident it will not be because, apart from anything else, we are taking collateral.

Q824 Mr Mudie: So it is 30 billion?

Mr Darling: No, it is not. Not at all. I will be very clear about this, Mr Mudie, because you do need to be clear about this. There is a world of difference between a loan of 30 billion to a commercial going concern and lender of last resort facilities, which are actually less than that, and what the Government is guaranteeing is the deposits. As the deposits are in the bank physically at the moment, and as we have collateral against which they are secured, it is not the same thing as giving a bank 30 billion worth of credit. Just for the sake of accuracy, have I got that right?

Mr Maxwell: I think that is absolutely right.

Q825 Mr Mudie: You are sacked if you say no!

Mr Darling: It is me I am thinking about!

Mr Macpherson: The critical thing in the terms is the rate and also, to use the term of art, the haircut, i.e. how much collateral you have to put up in exchange for the support.

Q826 Chairman: We all know what a haircut is but just explain it for the public.

Mr Maxwell: A haircut is the amount of discount you set against some collateral that somebody provides against a loan, so if you are making a loan to somebody and you take an asset which on the face of it is worth 100, you might apply a haircut to that so that you consider it as being worth 90 because you do not know how much it might be worth in the future. That is how a haircut works.

Chairman: A neat job!

Q827 Mr Love: In answer to a question earlier, you said that you as the Chancellor were ultimately responsible, and the Committee accepts that. Our difficulty has been in finding out before you entered the foray who was responsible amongst the tripartite authorities. Was anyone responsible and, more importantly, should someone be responsible in the future?

Mr Darling: The answer to the question is I am always responsible. Even if one of my officials attend the committee, I am responsible for the actions of my officials. I am very clear about that. It is what ministerial responsibility means.

Q828 Mr Love: You do not think prior to your involvement someone should have been taking responsibility in the tripartite, or do you assume that the Treasury takes responsibility?

Mr Darling: Maybe we are at crossed purposes here. Whatever Treasury officials do on my behalf, I am responsible for that. I carry the can. In relation to the tripartite committee, obviously, as a matter of routine, officials - deputies, as they are called - attend it because, if you look at the ten years it has been set up, there will be many meetings that are fairly routine and you would not expect the Chancellor to necessarily attend those but in relation to when it became clear that there were problems, sometimes the deputies attended, sometimes I attended myself but, whatever happened, I would have been told about it immediately so I knew about it.

Q829 Mr Love: I am obviously not getting anywhere with this. Can I take it from a different angle? There are many that say, because the Bank has responsibility for providing liquidity into the market and also has overall responsibility for stability of the system, that it is pre-eminent in the tripartite arrangements. Would you agree with that?

Mr Darling: Its core responsibility to maintain the stability of the financial system is set out in its objectives and that is a position, a job, that the Bank does day in, day out through its money market interventions. I think I said in relation to Mr Mudie's point that is its responsibility, yes. However, the whole point of a tripartite committee is because it recognizes that the FSA and ourselves, the Treasury that is, have an interest in it and that is why there is that committee. Ultimately, as I say, whatever the Bank does, we stand behind it.

Q830 Mr Love: The Bank today published its financial stability report and it has been widely interpreted in the media as suggesting a strengthening of its pre-eminence in the tripartite arrangements. Would you support that strengthening?

Mr Darling: There are two things. One is, the way I would interpret it, and rather more than that, the way I understand it, is that the Bank is very clear that it too has lessons to be learned, both in terms of how it intervenes and also the extent of its interventions. As I said right at the start of this, I think in answer to the Chairman's point, I think there are questions that we have to ask ourselves in relation to the precise responsibilities, particularly at the interface of where the FSA and the Bank operate. I am pretty clear that firstly, I will not take anything away from the fact that the Chancellor of the day is responsible for whatever happens but I think what we do need to do is to make sure that both the FSA and the Bank have very clear responsibilities and that, if there is any dubiety or any uncertainty as to who is doing what, that we sort that out.

Q831 Mr Love: You have talked on a couple of occasions, and in answer to this question you mentioned the interface. One of the things that the Bank has admitted to is perhaps poor communications between the tripartite parties. Do you think that is solely responsible for the problems that arose or is it more than just communication that needs to be looked at?

Mr Darling: Communication can always be improved. As I said in reply to an earlier question, I am not sure it was the committee itself or the structure of the committee that was the problem. We have to ask ourselves at each and every stage what are the problems that we need to try and fix? The problem I identify in relation to the tripartite arrangements is that I think there does need to be some clarification as between what the Bank does and what the FSA does and the fact that there is inevitably an overlap between the two. The Bank of England is not responsible for the prudential supervision of individual banks. However, when a problem arises in any individual bank, it could have wider systemic implications. That is one of the things that we need to look at and obviously, the converse of class applies so far as the FSA is concerned. It is in that area, especially in relation to early warnings, because obviously what we are trying to do here is to stop this problem arising in the first place rather than intervening, that we need to look at closely. I shall not repeat it at length but the other problems too are the international problems and also the fact that every single director of every single financial institution should really be asking themselves "What is critical to my business and if it goes wrong what do I do about it?" If the answer is "I don't know," they should start thinking again very rapidly.

Q832 Mr Love: Finally, when Northern Rock came before us they said the leak had made a big difference to the way this had all panned out but they also admitted that, even if there had not been a leak, they think they would have been difficulties in explaining this to the public. Can there be a role for just one authority speaking to the public at any time in relation to an issue like this? In other words, when you trigger the tripartite arrangements, only one group should be speaking to them rather than all the different authorities?

Mr Darling: I think most people who deposit money or do business with an institution want to hear from that institution as to what it is doing. Remember, a lot of the things that were happening lay within their control, and I certainly think the communications there could have been improved. Frankly, pushing a leaflet through a letterbox to people standing outside leaves an awful lot to be desired, and I certainly hope this does not happen again anywhere but it needs to be dealt with. I think also practical things like how you deal with people who come along asking for their money, other places in other parts of the world actually dealt with it a lot better than it was dealt with here. So communications are important. If your question is should that be done by the Bank of England, the FSA or the government, I will look at all these things and, if you have recommendations to make, I will certainly look at them but I think the first port of call, because so much is controlled by the actual bank - remember, this bank was solvent; it was a going concern. It still is. It is the one that primarily is responsible for communicating with what, after all, are its customers. They are not the Bank of England's customers.

Q833 Mr Brady: It was clear that the Governor of the Bank's preference would have been to deal with this through a covert intervention, and he was very explicit when he came in front of the Committee that he felt his freedom to do that was hamstrung by four pieces of legislation. You on the other hand said that you are sceptical that you could have done this covertly, I think you said because of today's market conditions being very different, so nothing to do with the legislation. Can I take it you disagree with the Governor's assessment that it is legislation that hamstrung him and prevented that action from taking place?

Mr Darling: I will say again to you what I said, I think, on the floor of the House, that I will look at the four pieces of legislation he was concerned about. One is the Market Abuse Directive, which is the disclosure of inside information. The other was the Takeover Code, which might, on one view, preclude something happening over the weekend. Then there is the insolvency legislation, which, I readily agree with him, is something that we need to look at, especially in relation to deposit protection. The fourth thing is the compensation scheme, which again, not only do I agree with him but we are already trying to resolve that. What I did say, and I said this on the floor of the House on 11 October, was that the issue before us prior to 13/14 September was not whether or not the Market Abuse Directive said that we could not do something. The issue was twofold. One is the directors were being advised that they had to make a profit warning and also my belief - and maybe because I am a politician I think of these things first - that someone is going to leak this and, as I say, sadly, I was right. I will look into all these things and if there is a problem with the Market Abuse Directive and it could be that there is a problem, that is clearly something we need to resolve but what I would say to you is, if there had been a realistic chance of rescuing this bank over a weekend, I would have done it and happily seen whoever was challenging us in court but that did not arise.

Q834 Mr Brady: I recognize this is something you are still looking at but if there is a problem with the Market Abuse Directive, do you think that is more likely to have arisen in terms of obligations placed on the company in terms of disclosure, or on the Bank in terms of what it was able to do?

Mr Darling: I think that Directive bites on both. It is basically designed to stop people from doing things and hiding the full extent of what they are doing to people that have a legitimate interest, like their shareholders but, like all these Directives, they do not just bite on the company concerned; I think they bite on other institutions and almost certainly public institutions as well. If it is a problem, we clearly need to deal with it. It is one of the things I will cover when I publish my proposals at the beginning of the year.

Q835 Mr Brady: Finally, there is, I think, an exemption in the Market Abuse Directive that seeks to give greater freedom of movement to central banks. Do you believe that is adequate?

Mr Darling: That is one of the things I have to look at but, as I said to you and I have said before, I do not think that was the fundamental problem that was facing us in the second week of September.

Q836 John Thurso: Chancellor, the support given to Northern Rock gives the impression that no bank with retail depositors can be allowed to fail. Is that actually the case?

Mr Darling: The position is as I set out in my statement of 11 October, which is that judgement has to be exercised as to whether or not the failure of an institution, no matter what sort of financial institution it is, would result in systemic damage to the financial system. It does not mean that we would intervene in every case. For example, the Bank did not intervene in relation to Barings in 1994.

Q837 John Thurso: I do not think Barings had retail depositors.

Mr Darling: No, it did not but a view had to be taken - obviously, I was not there at the time - as to whether or not the failure of that bank would have an adverse effect on the financial stability of the system.

Q838 John Thurso: So the fact that the Northern Rock depositors are being protected on this occasion is because not protecting them would have rocked the system?

Mr Darling: It is the system that we were concerned about. Mr Macpherson has just reminded me of course that BCCI did have retail depositors but the judgement was taken there that it would not cause the systemic problems that I believe would be caused this time.

Q839 John Thurso: So, to be absolutely clear, the fact that it has happened on this occasion is not a precedent that any other institution should feel able to rely on?

Mr Darling: Each case will be assessed on its merits.

Q840 John Thurso: Earlier on in your comments to one of my colleagues you described Northern Rock as being hopelessly exposed and their business model as being extreme, which I think everybody here would actually agree with today. A year ago Northern Rock was seen by the City as being a highly successful business with an excellent profit record and well worth investing in. What is the lesson for the City to take out of this? Do we actually have a problem with our understanding of risk generally?

Mr Darling: I think in general terms I agree with a lot of what the Governor said in his speech in Belfast a few days ago, and that is that he believes that all institutions ought to carefully evaluate the risk to which they are exposed. I have said before that regulators should concern themselves not just with institutions that do not appear to be doing terribly well but also with institutions that do appear to be doing terribly well because, if they are out of line, it may be they are doing a very good job but they ought to just be sure that that is the case. What is going on in the world at the moment is that people are re-pricing the risk and that is what is causing the difficulty. As the Bank says in its report today, and it is very evident from discussions I had with my fellow finance ministers in Washington at the weekend, this process is still going on all over the world and people do need to be far clearer about what risks they are exposed to and what they have done to lay off that risk by reducing it.

Q841 John Thurso: Just following up on that last question, if I may, on lessons learned, I felt when the board of Northern Rock came before us that the evidence given by the chairman of their risk and audit committee indicated that really, the bank itself had not looked at this risk and had not really properly worked out what they would do, which is, I think, very much what you are suggesting should happen. How do we get this through to companies, that risk and audit committees need to do more than tick boxes; they actually have to undertake the spirit of what that corporate governance is meant to be about rather than just the letter?

Mr Darling: I think in relation to financial institutions that must be the job for the FSA because it has to be a requirement on directors that they understand the risks to which they are exposed, and in this particular case there is nothing inherently wrong with having a risk as long as you have that risk covered off in some way or you can mitigate that risk. Nothing is risk-free. For example, other institutions that used this model and used to borrow on the wholesale market either also had banks with an investment arm so they had some other cover or they had standby credit facilities. Countrywide is a case in point. Northern Rock did not have that, and earlier this year they quite aggressively pursued the mortgage market, it was very dependent on getting a securitisation away at the beginning of September, which in the event they could not because, just at the time they needed to raise the money, the funds dried up.

Q842 Jim Cousins: Chancellor, the guarantee going to depositors was rapidly effective in calming the situation. Is there a time limit on that guarantee?

Mr Darling: We have asked the Northern Rock bank to come back to us with its proposals by the beginning of February and obviously, I am willing to review the situation at that time. We do have a state aid issue in that, as you know, there comes a point where the Commission will say this is going on for too long. I am not sure that is an immediate problem but I really want to get across to the bank that they have a breathing space, if you like; they need to consider their options; they have a new chairman now and they need to consider what the best course of action is for the bank. That is their decision, they are the directors, they own the company but we have given them that breathing space and we have said to them "Look, you need to come back by the beginning of February."

Q843 Mr Cousins: Of course the very phrase "breathing space" which I do understand does imply a time limit, but you have given the Committee this morning, I think, a very clear assurance that if the time has to run further than the beginning of February that would not necessarily be an obstacle.

Mr Darling: No, we are not saying it is a drop dead date. To take it to the extreme, if they said, "Look, we will come back to you in 10 years' time" I think there might be a problem.

Q844 Mr Cousins: Sure.

Mr Darling: I am reasonably confident they will come back to us rather sooner than that. We have to get state aid clearance for this sort of support and the state aid rules are quite clear, you can do this sort of thing to provide support in times of difficulty like Northern Rock but you cannot do it in perpetuity. I said, when I did the statement in the House a couple of weeks ago, I want to be as helpful as possible but I am afraid the bank needs to play its part too now. I am encouraged by the fact that perhaps with a new Chairman he will put a degree of not just expertise but a degree of vigour into trying to sort things out for them.

Q845 Mr Cousins: Have the European Commission advised you of any timescale in which they think the state aid restrictions would kick in?

Mr Maxwell: No they have not is the short answer, but there are different ways in which you can apply for state aid approval and some of those approvals have certain time limits on them.

Q846 Mr Cousins: And they are?

Mr Maxwell: Restructuring aid, for example, usually has limits around six months.

Mr Darling: Usually ---

Mr Maxwell: Usually it is very much as has been discussed.

Q847 Mr Cousins: There has been no specific instruction or advice from the European Commission that there is a clock ticking and an end date?

Mr Darling: No.

Q848 Mr Cousins: Has the tripartite considered what it would do in the event of the bankruptcy of Northern Rock?

Mr Darling: No because at the moment that is not an issue. My concern would always be, in the event of the bank being unable to find some way out, that we protect the depositors. The opportunity is now there to make sure that suitable arrangements can be made. I very much hope the directors will use this opportunity to try and find a way to enable the bank to carry on in one shape or form but that has to be a matter for them at the end of the day.

Q849 Mr Cousins: Chancellor, just to sum up. There is no drop dead date - to use your own phrase.

Mr Darling: Correct.

Q850 Mr Cousins: The tripartite committee has not considered what action it would take in the event of Northern Rock's bankruptcy?

Mr Darling: Because that issue has not arisen. The FSA have always said, and continue to say, that the bank is solvent. What you said in relation to the drop dead rate is absolutely correct, however, since I dare say the bank will follow these proceedings with great interest, that does not mean that I do not regard it as being a matter of urgency and I think a matter of weeks and months is what we are talking about. They need to come forward with a proposal because self-evidently they need to find a long-term solution for the problems they have got.

Mr Cousins: People in the North East, Chancellor, will be grateful to you for what you have said this morning.

Q851 Chairman: Finally on the Northern Rock issue, when the Governor was here before us he told us that he had sent you a letter on 13 September which gave advice on further borrowing of Northern Rock and he would be happy for that to be made public. I have written to you on that, could you give us your comments on that, please?

Mr Darling: Yes. I have got your letter and I have considered it carefully. I have looked again at what the Governor said to me and what the Chairman of the FSA said. For the record, they wrote recommending that I authorise the provision of lender of last resort facilities. I do not believe that it would be in the public interest to release these letters at the moment. In particular the Chairman of the FSA is quite clear that he wrote to me on a confidential basis and has made it very clear that he would have concerns for the future if he thought letters that he sent to me with his best advice were to be made public, at least in the immediate vicinity of problems arising and also having regard to the fact that the Northern Rock position is not yet clarified. I do not believe that I can release these letters. I am not saying that I cannot do so at some point in the future but my judgment - and it has to be my judgment on this - is that I do not think it would be in the public interest to release these letters at the moment.

Q852 Chairman: So it is relating to the immediate environment, maybe at a later date you will.

Mr Darling: I am happy to revisit the position but I will have regard to two things. One is the situation at the time a request is made but I also want to make sure that in future, whether it is me or any other chancellors in the future, that both the Governor and the Chairman of the FSA can write to me in terms which are more than a formality, that can actually be proper advice. Therefore, as in all these things, of course they need to be looked at on their merits, but that is the position, regrettably, that I find myself in at the moment.

Chairman: Chancellor, can I thank you for the first half of this session so we can release Mr Maxwell but it is not goodbye, we will see you some time later. Thank you very much.