Select Committee on Treasury Minutes of Evidence


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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