Examination of Witnesses (Questions 60
- 79)
THURSDAY 20 SEPTEMBER 2007
MR MERVYN
KING, SIR
JOHN GIEVE,
MR PAUL
TUCKER, MS
KATE BARKER
AND DR
ANDREW SENTANCE
Q60 Mr Brady: And it is your understanding
that that would apply whether it was a UK bank or a foreign bank
operating in a UK environment?
Sir John Gieve: If you have a
foreign bank with a branch here obviously the lead on that is
taken by their own supervisor and central bank in their country
of origin. So, for example, if there was, I do not know, a French
bank that had a branch here, the question of whether or not that
needs liquidity support depends on its position in its home country
and internationally. It is difficult to think of an example where
there would be a purely British liquidity crisis for a branch
of a foreign bank.
Q61 Mr Brady: So UK depositors with
such a bank can take no comfort from the guarantee that has come
from the Chancellor?
Sir John Gieve: The Chancellor's
words are not specific on this and it would obviously depend on
the circumstances, but generally the home country authorities
would take responsibility for their banks, and that would apply
to us, too.
Q62 Mr Brady: Thank you. Can I ask
just one other slightly different question to the Governor again.
Governor, you said earlier that you had pressed strongly for the
ability to conduct a covert operation. When did you press strongly
for it? I was not sure whether that was a reference to the period
when the Market Abuses Directive was under consideration or whether
it was in the period since it had come into force.
Mr King: No, it was during this
particular crisis with Northern Rock where I found it hard to
believe that a public policy intervention that was in the interests
of everyone in Northern Rock could not go ahead because of a legal
responsibility to disclose. There is wording in that Market Abuses
Directive which would give you the impression that, in a case
of financial distress, it would be possible not to disclose but
we had to take legal advice. I would say this occurred in the
period between about 22 August and the date on 9 September when
it became clear that we were discussing seriously doing the lender
of last resort operation and we were advised finally that it could
not be covert, but Sir John was involved in many of the discussions
here at the deputies level.
Sir John Gieve: Can I just clarify
one point about foreign banks. Of course many foreign banks form
British subsidiaries here and they are authorised in their own
right by the FSA, so the legal structure matters a lot here. I
do not want to mislead you on that.
Q63 Mr Mudie: I find it hard to believe
and sad, I think, that you were warned by Mr Tucker—and
I am speaking to the Governor and yourself—the relevant
people were warned and the relevant institutions were warned in
July about the problems that were there in terms of the money
markets and yet took until 14 August for it to get on your desk
and there be some thought of action. What I have heard today (which
alarms me) is that you have spent some time in the last question
telling us what you could not do but I am sitting here as a politician
and I am thinking you are the Governor of the Bank of England,
you knew about this in July, you gave it some attention in August
before those crowds built up outside Northern Rock and it became
an issue; what was the Bank of England's inclination or policy
intention because you could not sit and do nothing, you knew there
was a problem, you knew it was going to blow up in September because
that is when Northern Rock was going for money in the markets
in a major way. How was it going to be solved before you took
that action in September? What was your plan?
Mr King: The Bank of England is
not responsible for individual institutions.
Q64 Mr Mudie: Sorry?
Mr King: The Bank of England is
not responsible for individual institutions. We act when the FSA
come to us and say, "We think an individual institution ...
"
Q65 Mr Mudie: That is nice to know,
but the impression you have given this Committee is you were very
anxious to do something, not the answer you have just given that
it is nothing to do with us.
Mr King: Can I just—
Q66 Mr Mudie: You said it is not
our responsibility but you have spent the time up to now saying,
"We would have loved to have done something but it was a
lack of legislation, it was this, that and the other," and
I say okay, you appear to be very concerned and wanting to do
something, you looked at various things and you found excuses
for not doing them, so what on earth were you going to do?
Mr King: Let me tell you an answer
to that question.
Q67 Mr Mudie: Good.
Mr King: The problems in Northern
Rock were drawn to our attention on 14 August.
Q68 Mr Mudie: No, Mr Tucker—
Mr Tucker: To be clear about what
I said—
Q69 Mr Mudie: Mr Tucker, I
know what you said, you said that you became aware of the problems
in the capital market and you sent it across to the relevant people
and institutions. Northern Rock's business model is regarded as
extreme. It works but it is extreme because it depends on cheap
credit and easy money, liquidity at a high degree. You were telling
people in the institutions and your own institution, the other
departments and divisions, that we have got a problem, and anybody
would have put two and two together and said which of our institutions
is going to be hit first. Northern Rock was an obvious one and
I am just saying that should have rung bells. Is that fair? Thank
you, Mr Tucker. I am just saying in a well-run institution it
should have rung bells and we would have expected the Governor
of the Bank of England to say, This is going to cause us problems;
what can we do?" We have heard he did say that and then he
discovered that he could not do things. What could you do, what
were you planning to do?
Mr King: I will tell you what
we were planning to do. The problems that could have arisen in
all these institutions, Northern Rock and any other British bank
were triggered by the events of 9 August and we knew that if this
were to cause problems we could act as lender of last resort but
a lender of last resort is a lender of last resort. If we had
jumped in within a week and announced that we were lender of last
resort to Northern Rock that could have been very damaging to
the institution. We knew that we were there as the backstop, as
lender of last resort.[2]
Q70 Mr Mudie: So you were content
to watch this impending disaster, this train running towards the
buffers, you knew it was going to happen in September and you
were saying, "I cannot do anything, but I will be the lender
of last resort when it hits the buffers"? Did you tell the
Government and did you tell the FSA, did you get that Tripartite
Committee round the table? What did they decide to do, if anything,
or did they sit with you and say—because this is the impression
you have given which is horrifying—we do not know what to
do. I will tell you what is horrifying, that on both things—your
U-turn on three-month money and on Northern Rock—it was
forced upon you by people queuing outside the building societies,
not that you had a well-ordered plan, not that you were preparing
plans; you just watched it hit it and you panicked because it
hit the buffers?
Mr King: I am afraid that none
of that is true.
Q71 Chairman: Answer that short question,
Governor!
Mr King: Indeed.
Q72 Mr Mudie: It is a relevant question.
Mr King: It is a very fair question
and I would like to answer it.
Q73 Mr Mudie: That is what ordinary
people and that is what the City are asking.
Mr King: Would you let me answer
it. On 9 August the events were triggered that meant that the
risks we had been warning about for a long time materialised.
On 14 August we discovered that those risks were serious in Northern
Rock. At that point there did not seem much point in blowing up
the train before it hit the buffers because there was a long time
in the intervening period in which we might be able to find a
way for Northern Rock to survive. That was the main responsibility
of Northern Rock's management. It tried to find funding and it
tried to sell its assets. If it had been successful in these events
then the problem would not have materialised. We knew that in
the last resort we could be lender of last resort and we prepared
for that. The way I would have preferred to be lender of last
resort was not open to us but if we had activated lender of last
resort earlier the same problems would have occurred beforehand
without giving a chance to find another way out.
Q74 Mr Mudie: There is a suggestion
that TSB walked away from the table because you were unwilling
to give that guarantee. I heard that it took you about nine days
to get legal opinion, which I find alarming.
Mr King: I am sorry, this is complete
nonsense.
Q75 Mr Mudie: Why did TSB walk away?
Mr King: I have no idea what bid
discussions were going on. I knew that there were some bidders
interested. When I was asked last Sunday what the terms on which
a bid could be completed were, I confirmed very quickly that we
would roll over the lender of last resort facility to any bidder.
I am absolutely in favour of having a bid as a long-run solution
to Northern Rock if that can be achieved. I did not oppose a bid,
I supported it, but last Sunday, Mr Mudie, only a Government guarantee
would have stopped that run. A bid would not have done it nor
would any other solutions.
Q76 Mr Mudie: Let us just be clear.
TSB were still at the table until last Sunday when they got word
from you that the legal advice you had got meant you could not
be the lender of last resort?
Mr King: No, not at all. I was
asked by the FSA whether in the event of someone bidding—and
this was a generalised proposition, not a particular institution—
Q77 Mr Mudie: Who asked you?
Mr King: Callum McCarthy at the
FSA. He said in the event of a bid being made would it be the
case that the lender of last resort facility that had been put
in place the previous Friday would be extended and rolled over
to a bidder, and I said yes.
Q78 Mr Mudie: Let us clear it up
for the City and for the media. This has been in the press for
some time that Northern Rock were touting themselves around, there
were two British banks interested one of which was Lloyd's (who
stayed the course) but they went away after getting bad news.
Are you saying this took place last Sunday when they got the bad
news? The City has got the impression they walked away long before
that because they were told you would not agree terms.
Mr King: That is absolute nonsense.
The lender of last resort facility was only announced at seven
o'clock in the morning on the Friday.
Q79 Mr Mudie: It was only announced
that you were going to be lender of last resort. Lloyd's TSB,
it is rumoured, had put it as a condition of taking over Northern
Rock and giving a market solution that would have saved all this
nonsense, and they put that to you some time before.
Mr King: That is not true.
2 Note from witnesses: I explained to Mr Mudie
that, during the weekend after the lender of last resort facility
was made available to Northern Rock on Friday September 14, I
was asked by the FSA whether that facility would continue to be
available in the event of a successful bid for Northern Rock.
I explained that it would be. Back
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