Examination of Witnesses (Questions 120
- 139)
THURSDAY 20 SEPTEMBER 2007
MR MERVYN
KING, SIR
JOHN GIEVE,
MR PAUL
TUCKER, MS
KATE BARKER
AND DR
ANDREW SENTANCE
Q120 Mr Mudie: I know that and you
said that. I am saying if it turns out that they are—and
we have already heard and been critical of the lack of activity—would
you guarantee that we will have some activity if the numbers keep
at this high level?
Ms Barker: Again, I have to say,
and it must be apparent, I could not give that guarantee because
it would not be within my remit.
Mr King: We have two ways in which
we can be involved in this. One is that we will look carefully
at the credit conditions in the economy and the housing market
in making our judgments about interest rates, and that is a key
point. If we feel that there are aspects of the housing market
that require separate, specifically tailored interventions, we
can discuss that with other government departments. It would be
quite wrong for me to—
Q121 Mr Mudie: No, I realise it is
off-the-cuff but that second one is very useful. Will you undertake
to do that if the high figures continue and it looks as though
we are going to revert?
Mr King: I will certainly undertake
to talk with colleagues in government.
Q122 Mr Mudie: Thank you.
Mr King: One last point I would
like to make is that the United States does face quite serious
problems in its housing market which are of an altogether different
order of magnitude from those here.
Q123 Mr Fallon: Governor, you have
just said that you expect the events of the last seven days not
to have damaged long-term confidence in the British banking system.
How much damage do you think it has done to the reputation of
the Bank of England and your Governorship?
Mr King: I think only others can
judge that. All I can do is take the decisions that I think to
be appropriate in the interests of the country as a whole, to
come and explain that to you and others before this Committee
and elsewhere. You will have to make that judgment, not me.
Q124 Chairman: Paul Tucker, you have
discussed the liquidity problems, you have done that all morning
but what are the markets saying about the sub-prime credit problems?
Are they going to wash up soon and where are they going to wash
up?
Mr Tucker: This goes to the point
that the Governor was just making. This is the underlying serious
problem and the data over the last few months has suggested that
it has got worse, and I suspect that the Federal Reserve's action
on interest rates earlier this week has partly been taken with
that in mind. I think one of the most important things now will
be to see whether the action that the Fed has taken starts to
stabilise the market in the US.
Q125 Chairman: What action are you
taking, Sir John, at the FSA? Have you got any anticipatory action
that you are taking on this? Do you vet it very closely?
Sir John Gieve: On sub-prime within
the UK as opposed to the US sub-prime losses, the FSA has been
doing some intensive work on, if you like, the riskier end of
the mortgage market and you will see it issued something just
at the beginning of last month about mis-selling and standards
at that end of the market. I would just like to repeat what the
Governor says that all the analysis that they and we and I think
outside commentators have done suggests that the sub-prime problem
insofar as it exists in the UK is very, very much smaller than
in the US.
Q126 Chairman: 5% I think it was.
Paul Tucker, you are in charge of the market area. How long
has market chatter been going on about Northern Rock? Somebody
has described it to me as "a bright red flashing light which
the FSA did not look at" and "they would not know a
potential problem if it hit them in the face".
Mr Tucker: We do not focus on
individual institutions. We really do stick to our mandate under
the MoU and the market situation as a whole and I have described
and John and the Governor have described—
Q127 Chairman: It does not give me
much assurance that you stick to your mandate because we ended
up with a crisis. As George Mudie said, we are looking for some
action from people to ensure that we do not get into the difficult
situations, so sticking to your mandate is a pretty unacceptable
phrase.
Mr King: Chairman, there have
been other occasions when we have come before the Committee where
you have asked us the question "Is not that going outside
of your mandate?" We have been given a clear mandate and
our responsibility is to meet our mandate.
Q128 Chairman: I understand, Governor,
but the fact of the matter, as I said earlier on, is here we have
a situation where we end up with problems that affect the whole
financial system and it is how you work that, that is what we
are looking for; we are looking for reassurance.
Mr King: I understand that and
what I would suggest is that you talk to all the players involved
and then reflect on it and make your judgment.
Q129 Chairman: We will do that. Are
there any others in potential trouble? You do not need to name
them!
Mr King: I think you know perfectly
well that central bank governors cannot go—
Q130 Chairman: Governor, I was not
even talking to you; I was talking to Paul Tucker.
Mr Tucker: Central bank directors
take the same approach.
Q131 Chairman: Okay. John Gieve,
you say you were alerted to the Northern Rock situation on 14
August. How many days have you been at the Bank since 14 August?
Has every day been a strenuous day for you?
Sir John Gieve: No, I was not
at the Bank on 14 August. I was away for two weeks in August,
first at a family funeral and then for a week in France.
Q132 Chairman: So you were away for
three weeks?
Sir John Gieve: No, two weeks.
Q133 Chairman: So from 14 August
you were away until the beginning of September?
Sir John Gieve: No, I was back
at the end of August. I was in touch with the office. I discussed
with the Governor whether I should return. At that stage he thought
that was not necessary. I therefore came back before the beginning
of September and of course I have been here since.
Q134 Chairman: Okay. Are your FSA
and Deputy Governor roles at one? In other words, is the agenda
which the FSA has the agenda which the Bank of England has at
one? If we read some of the papers yesterday we would be forgiven
for thinking they were not at one. What is your view as an ex
officio member of the FSA as well as Deputy Governor?
Sir John Gieve: I think, as the
Governor said, the co-operation has worked extremely well and
relations are good and there has been no conflict. Of course there
are different views between and within institutions about whether
we should do this or that, but I think the tripartite arrangements
have worked well. Just on this red flashing light, it is easy
to be wise after the event but the markets through the spring
and early summer were not saying that Northern Rock was a disaster
waiting to happen and it was not the institution that would be
affected by problems in sophisticated credit derivatives.
Q135 Chairman: But there was market
chatter.
Sir John Gieve: Market chatter
accelerated through August.
Q136 Chairman: Northern Rock increased
its mortgages threefold beyond anybody else in the market. It
had fewer deposits to which to have recourse. In other words,
it was almost wholly dependent on going to the wholesale markets.
Any good risk director worth his or her salt would have said,
"Wait a minute, if we are dependent on one variable here,
if that goes wrong we are all up the shoot," so what we are
really asking here is was the FSA on the job, were you on the
job in saying, "Wait a minute, if things go wrong here, Mr
Applegarth, we are really in trouble." You are not giving
us any assurance this morning that you were on the job.
Sir John Gieve: I first spoke
to Mr Applegarth about the facility we were going to operate on
10 September. It is not my job as a non-executive director of
the FSA to get involved in talking to the risk managers and managers
of individual banks, but I do know that the FSA were very closely
in touch with them.
Q137 Chairman: Do not try and minimise
this.
Sir John Gieve: I am not trying
to minimise this.
Q138 Chairman: You are responsible
for the strategic focus, that is what it is, we are not asking
you to go into micro management, it is the strategic focus, and
we are asking you were you alert to that and your answer given
to us this morning is that you were not doing much. In fact it
seems to me that you were pretty laid back about it.
Sir John Gieve: I do not agree
with that. We were alert to the dangers of the financial markets.
Q139 Chairman: I do not think you
have convinced this Committee.
Sir John Gieve: If you look at
what we said in April and what we said in a number of speeches,
notably the Governor's speech just before the summer, it could
not have been clearer about the risks of liquidity problems in
financial markets. If you say did we see exactly how it would
pan out and why it would impact on Northern Rock, which had no
particular sub-prime connections and credit derivatives holdings,
no, we did not see that, but of course you are absolutely right—
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