Introduction

Overview of this chapter

67. This chapter examines the events of August and September 2007, principally in relation to Northern Rock plc. This chapter also considers some wider issues relating to the money market operations of the Bank of England, which are intertwined with developments relating to Northern Rock. We will report on the wider aspects of the events of August and September, including their causes and consequences and the international dimension, in our forthcoming Report on Financial Stability and Transparency.

68. In this chapter, we examine events and decisions in August and September in considerable detail and reach conclusions. We believe that a full understanding of those events and decisions and an analysis of mistakes made during that period are essential if the correct lessons are to be learned. We seek to draw out those lessons and make recommendations for the future in the ensuing chapters.

NORTHERN ROCK'S PROBLEMS AND TRIPARTITE AWARENESS OF THEM

69. Soon after inter-bank and other financial markets froze on 9 August, it became evident that Northern Rock would face severe problems if the markets were to stay frozen for long. The problems were especially severe for Northern Rock because its funding model required mortgage-backed securities and plain mortgages to be securitised, and its next securitisation was scheduled for September 2007.[195]

70. The then Chairman and Chief Executive of Northern Rock first discussed these problems with each other on Friday 10 August.[196] On the same day, the FSA contacted the financial businesses that it perceived might be at risk from the freezing of financial markets. One of these was Northern Rock.[197] Northern Rock replied to the FSA on the next working day, Monday 13 August, alerting the FSA to the potential difficulties that Northern Rock would face if the market freeze continued.[198] Thereafter, the FSA and Northern Rock were in twice-daily telephone contact.[199]

71. On Tuesday 14 August, the first discussions on Northern Rock took place between the Tripartite authorities at deputy level—Mr Sants, Sir John Gieve and a senior Treasury official.[200] The Governor of the Bank of England was alerted on that day.[201] On Wednesday 15 August, a more detailed conversation took place between the FSA and the Treasury, and the Chancellor of the Exchequer was informed about Northern Rock on that day.[202] On Thursday 16 August, the then Chairman of Northern Rock spoke directly to the Governor of the Bank of England by telephone, and the possibility of a support operation was discussed.[203]

72. On Wednesday 29 August, Sir Callum McCarthy wrote formally to the Chancellor of the Exchequer indicating that the FSA believed that Northern Rock "was running into quite substantial problems".[204] On Monday 3 September, the Tripartite Committee met at the level of principals—the Chancellor of the Exchequer, the Chairman of the FSA and the Governor of the Bank of England.[205] The decisions taken then and subsequently are considered in detail later in this chapter.

THE THREE OPTIONS PURSUED

73. Between 10 August and mid-September, Northern Rock and the Tripartite authorities essentially pursued a three-fold strategy to extricate Northern Rock from its difficulties. The three options pursued were:

i.  Northern Rock resolving its liquidity crisis through its own actions in short-term money markets and by securitising its debt;[206]

ii.  Northern Rock obtaining the "safe haven" of a takeover by a major retail bank;[207]

iii.  Northern Rock receiving a support facility from the Bank of England guaranteed by the Government.

74. There was considerable overlap between consideration of the three options. The prospects for a market solution through the money markets, including by securitisation, were pursued until 10 September.[208] The search for a private "safe haven" which would preclude the need for a Bank of England liquidity support operation was started on 16 August and continued until 10 September.[209] The possibility of a Bank of England support operation was raised as early as 16 August.[210]

75. In the account that follows, we consider in turn three elements of the story in August and September that in fact took place to a considerable extent in parallel. First, we consider the Bank of England's money market operations in August and September and the extent to which they might have assisted Northern Rock to liquify its assets without resort to a take-over or to the resources of the State. Next, we examine the prospects for a private sector "safe haven" option. Finally, we consider the support operation, the run that followed news of that operation, and the issue of a general guarantee to Northern Rock depositors. Although this chapter includes an assessment of the judgements reached by the Tripartite authorities in August and September, consideration of the wider lessons from the crisis is reserved for a later Chapter.[211]

The Bank of England's money market operations until 20 September

MONEY MARKET REFORMS

76. The Bank of England undertakes money market operations to enact the decisions made by the Monetary Policy Committee regarding movements in interest rates. The Bank of England has recently changed its money market operations, and we as a Committee have monitored that process. At his reappointment hearing in October 2005, Paul Tucker, Executive Director for Markets at the Bank of England, told us that the Bank of England's Money Market reform project was continuing and that "So far, everything internally is going pretty well".[212] Asked whether sterling overnight interest rates would exhibit lower levels of volatility, he replied that "The announcement that we are going to do something about this has helped to make a difference and some interim reforms that we introduced between March and August of this year have also brought the amplitude down".[213]

77. On 29 June 2006, we questioned Mr Tucker again on the money market reforms, and how he would measure his success. He replied:

We have four objectives. The first is to reduce the volatility of our overnight money market rate from where it has been. Relative to many markets abroad, for as long as the Governor and I can remember, our overnight money market rate [volatility] has been unusually high, especially unusually high for a great global financial centre. I want to put emphasis on this, because this is the key objective, and it has made the sterling money markets a relatively unattractive place unless you were already an expert. That was the first objective. I will come back to that. The second was to give the banking system more flexibility in managing their liquidity, both as a system and at the level of individual banks … In terms of how I would measure it, the first one is straightforward; we would measure simply the day-to-day volatility of the overnight money market rate relative to the past and relative to that in the euro area and in the dollar money markets. So far, and we are only six weeks into this thing, it is much lower than in the past and in line with the dollar area and the euro area. But I rather agree with what is implicit in your question, this is something to look back on after a year rather than to declare a victory after six weeks. The second objective, in terms of making the system more flexible for their liquidity management, I think we can be reasonably confident that is achieved. Historically, very few banks have banked with the Bank of England and participated in our operations; that has roughly tripled and, in terms of the share of the sterling banking system, now accounts for about 90% of banking activity out there. That has given far more banks direct access to our balance-sheet (a); (b) for the first time ever, banks can borrow from us on demand during the day, at a penalty rate, against high quality collateral, in unlimited amounts; and (c) rather than having to balance their books with us at the end of each day, now they target an average balance over a month and that gives them much greater day-to-day flexibility in their liquidity management.[214]

78. On 28 June 2007, as part of our inquiry into the May 2007 Inflation Report, we questioned Mr Tucker on how the money market reforms had settled in. He replied:

There were four objectives. The first and by far the most important was to reduce volatility in short term money market rates, so the market in which we implement monetary policy. I am very glad that that has been successful. Volatility is much lower in short term money market rates and I hope it stays that way. The second objective was to improve the ability of the Bank through its operating system to inject liquidity into the banking system in normal conditions and in stress conditions. I believe that to be the case in normal conditions. I believe it to be the case in stress conditions but we thankfully have not yet been tested on that, but our apparatus is much better than it was in the past.[215]

THE BANKS' REQUEST FOR ADDITIONAL LIQUIDITY IN AUGUST

79. In August 2007, the Bank of England was approached by banks arguing that the Bank of England should provide additional liquidity, at no penalty rate.[216] The FSA had transmitted the banks' request to the Bank of England,[217] but refused to state to us whether it had supported the banks in requesting this additional liquidity, on the grounds that conversations between Tripartite members ought to remain private.[218] On 12 September 2007, in advance of his oral evidence on 20 September, the Governor of the Bank of England wrote a letter to the Chairman of this Committee. In that letter, the Governor pointed out that he did not agree with the suggestions for additional measures that others believed the Bank of England should undertake: lending at longer maturities, removing the penalty rate or increasing the range of collateral against which the Bank would be prepared to lend. In the letter, he gave three reasons for his position.[219] First, he stated that "the banking system as a whole is strong enough to withstand the impact of taking onto the balance sheet the assets of conduits and other vehicles". Second, "the private sector will gradually re-establish valuations of most asset backed securities, thus allowing liquidity in those markets to build up". Third, there would be a risk of 'moral hazard'. In essence, this 'moral hazard' argument is that, should the central bank act, and effectively provide extra liquidity at different maturities against weaker collateral, markets would, especially if the liquidity were provided at little or no penalty, take it as a signal that the central bank would always rescue them should they take excessive risk and get into difficulties. Such a signal would lead to ever more risk taking, and the next crisis would consequently be greater than it would otherwise have been. In conclusion, the Governor wrote:

All central banks are aware that there are circumstances in which action might be necessary to prevent a major shock to the system as a whole. Balancing these considerations will pose considerable challenges, and in present circumstances judging that balance is something we do almost daily.[220]

80. There appears to have been some disagreement within the Tripartite authorities over the weight that should have been placed on the dangers raised by moral hazard. Sir Callum McCarthy told us that:

I think that there it is an important question of balance between the issues of moral hazard, which the Governor addressed very clearly in his memorandum to this Committee and what I would call the problem of damaged innocent bystanders in the sense that there is a problem associated with a worldwide liquidity drying up, which affects not only people who have played a part in arguably irresponsible behaviour, which is the Governor's concern, but much more widely in terms of other people who can possibly be harmed by that event … I think that it is possible for people to have different views, and my own view of the balance between the moral hazard arguments and the other instances is slightly different from the Governor's.[221]

81. In his letter of 12 September, the Governor explained that banks operating under the reserve scheme system select their own target for the reserves they will hold with the Bank of England at the start of a 'maintenance period'. These maintenance periods run from one Monetary Policy Committee meeting to the next. Should banks require additional funds during this period, they may use, at their request, the 'standing facility', which allows them to borrow all they need against "eligible collateral and [at] a penalty rate of 1% above Bank Rate".[222] Another 'standing facility' allows banks to deposit funds with the Bank of England. In his letter, the Governor pointed out that the banks chose to raise their reserve requirements by 6% in the maintenance period starting 6 September 2007. On 5 September, before the start of the 6 September maintenance period, the Bank of England announced that, if the secured overnight rate had not fallen from its higher than usual level above Bank rate, the Bank would be prepared to offer additional reserves, amounting to 25% of the requested reserves target, before the end of the 'maintenance period'.[223] On 13 September, this criterion was met, and additional reserves were provided. An additional fine-tuning operation occurred on 18 September—following the run on Northern Rock—again offering £4.4 billion, or 25% of the reserves target.

THE RESPONSE OF OTHER CENTRAL BANKS

82. Meanwhile, other central banks were reacting in different ways to the unfolding turmoil. On 17 August the US Federal Reserve announced a change to the Reserve Banks' usual practices "to allow the provision of term financing for as long as 30 days, renewable by the borrower".[224] Additionally, the Federal Reserve reduced the 'primary credit rate' spread above the Federal Open Markets Committee (FOMC)'s target federal funds rate by 50 basis points. The 'primary credit rate' is not the main interest rate normally followed by economic commentators, but is rather the interest rate charged to those banks approaching the Federal Reserve's discount window for short term liquidity. This 'discount window' is similar to the UK 'standing facility' outlined above, but accepts a much wider range of collateral. Professor Buiter said that "at the US discount window you can discount anything, including cats and dogs, in principle".[225] On 18 September, the FOMC agreed to a 50 basis point cut to the federal funds rate, to 4¾ percent. The US had begun to cut interest rates in reaction to the crisis. At that time, the FOMC explained that "today's action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time".[226] Further 25 basis point cuts would be made to US interest rates on 31 October and 11 December.[227]

83. The European Central Bank (ECB) intervened swiftly to counter tensions in the euro money market in August. The ECB did not inject additional liquidity over the full August maintenance period running from 8 August to 5 September, but it did alter the time pattern of its supply of funds. On 9 August, in response to unusually high spreads in the euro money market between the overnight rate and the ECB policy rate (see chart 2), the ECB 'frontloaded' their supply of credit for the August maintenance period, injecting €94.8 billion, which along with further operations in the following weeks, achieved the aim of returning overnight rates to the policy rate. This additional liquidity was then drained from the euro money market before the maintenance period ended on 5 September, thus ensuring that the average liquidity supply across the month remained unaffected. When we visited the ECB in January 2008, its officials told us that their August frontloading operation was necessary to offer comfort to the euro money market at a time of heightened tension. Their view was that, because this was first and foremost a crisis of confidence rather than a credit crisis, moral hazard arguments were not the highest priority. This was not a situation where the ECB was "bailing out" any particular banks, but, in the ECB's view, rectifying a generalised lack of confidence. The ECB argued that an overall collapse of the market due to a lack of confidence required from them a strong signal that they would step in to provide whatever liquidity the market desired.

Chart 2 Overnight rates - Sterling, Euro and Dollar*

Source: Bloomsberg/Bank of England
*Overnight Libor spreads over policy rates

Chart 3: 3-month rates - Sterling, Euro and Dollar

Source: Bloomberg/ Bank of England
* 3-month Libor spreads over comparable overnight index swap rates

Comparing the Bank of England's response with other central banks

84. Questions have been raised as to whether the Bank of England was too slow in accepting the need for additional liquidity, both at different maturities, and against a wider range of collateral, when compared with other central banks. As outlined above, other central banks apparently reacted faster to the problems developing in international capital markets. The turmoil in money markets around the world was manifested in the spreads between the overnight rates (the rate that banks were willing to lend to each other) and central banks' policy rates. In common with other central banks, the Bank of England's primary objective is ensuring stable overnight money market rates in line with its policy rate, although the Bank seemed reluctant to act in August, when overnight rates deviated significantly from the policy rate. The action of the ECB on 9 August succeeded in bringing euro overnight rates back into line with policy rates, whilst sterling overnight spreads continued to rise, peaking on 13 August, and then remaining unusually high throughout the Bank's August maintenance period (see chart 3).

85. Professor Buiter argued that the Bank of England's approach was too restrictive when compared with other central banks.[228] He told us that:

I think the Bank of England made policy errors, even given the existing framework, in its management of liquidity. Its demands for collateral were too strict-stricter than any other central bank that matters, much stricter than those of the ECB and stricter than those of the Fed—and its demands for collateral at its discount window, the so-called standing lending facility, were also way too strict. Basically they would discount only stuff that is already liquid: UK government securities; European Economic Area government securities; a few international organisations' debt like the World Bank; and then, under special circumstances, US Treasury bonds. All that stuff is liquid already so all the Bank offered at its discount window was maturity transformation, not liquidity transformation, and that was absolutely no good. When they created the Liquidity Support Facility for Northern Rock they created what the Bank's discount window should have been all along—something that lends against illiquid collateral and also lends for longer periods, because the Bank discount window is only for overnight lending. [229]

86. However, not all witnesses supported the approach taken by the Federal Reserve and the ECB in August. Professor Wood disagreed with Professor Buiter's point that the Bank of England should have been involved in liquidity transformation, telling us that he thought the Bank's refusal to engage in liquidity transformation "was exactly the right thing to do".[230] Professor Wood was unsupportive of the immediate actions of the ECB and the Federal Reserve:

It seems to me therefore that the Bank of England's behaviour in being very reluctant to take securities that they would not normally take, except when the crisis got really bad, from Northern Rock and refusing to accept them from other institutions for some considerable time was exactly the right thing to do. The casual lending on almost anything that the Federal Reserve and the ECB did almost immediately seems to me to have been an error of judgment and is likely to bring problems in the future.[231]

87. The Chancellor of the Exchequer pointed out that, despite the more proactive approach taken by the Federal Reserve and ECB, banks in the US and Eurozone also got into difficulties:

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.[232]

88. Defending the actions of the Bank of England, the Governor was keen to explain that, contrary to the "myth" propagated by commentators, the actions of the ECB and Federal Reserve were "all remarkably similar":

One of the points most people fail to understand … is that the European Central Bank has not increased the amount of liquidity at all since the beginning of August. It has redirected some of the liquidity that it would have done at one-week term to three-month term, but the total amount of liquidity that it extends to the banking system is absolutely the same now as it was in June and July before the turmoil began in August. That is not readily understood by many people. The amount of liquidity that we are extending to the banking system is almost 30% higher. I do not put enormous weight on that. I think what we have is a system, which I prefer, in which the banks can choose their own reserves targets. If they say they would like to hold more reserves with the Bank of England we readily supply it on demand. That is why we are supplying 30% more now than we were. Equally, the Federal Reserve has not raised the total amount of liquidity very much. There is a certain myth in all this that goes around and we take our share of the responsibility for not explaining it properly, but it is not easy to get across these points[233]

89. The Bank of England, the European Central Bank and the Federal Reserve each pursued a different course of action in response to the money market turmoil in August 2007. Only the Bank of England took no contingency measures at all during August, in order to protect against moral hazard, that is, the fear that an injection of liquidity would offer incentives for banks to take on more liquidity risk, secure in the knowledge that the Bank of England would step in to resolve future liquidity crises. The European Central Bank appeared to attach far less weight to the moral hazard argument than the Bank of England. Instead, it adopted a proactive approach in resolving what it saw as a practical problem of a faltering market resulting from banks losing confidence in each other. Although the European Central Bank injected no net additional liquidity in August, it did alter the timing and term profile of its regular operations, front-loading its credit supply towards the start of August, and draining this liquidity before the end of the maintenance period. In doing so, the European Central Bank appeared to satisfy the immediate liquidity demands of the Eurozone banking sector, whilst UK banks' sterling demands went unmet. We are unconvinced that the Bank of England's focus on moral hazard was appropriate for the circumstances in August. In our view, the lack of confidence in the money markets was a practical problem and the Bank of England should have adopted a more proactive response.

90. We accept the Governor's comments that the Bank of England injected additional liquidity into the money markets in September, when the ECB and Fed did not. This was not a decision on the part of the Bank, but a consequence of banks being able to choose their reserve requirement for each maintenance period. The Bank of England should set out, in its response to this Report, the rationale for having a voluntary reserves system, rather than a system that stipulates reserves requirements for each bank.

WOULD EXTRA LIQUIDITY HAVE SAVED NORTHERN ROCK?

91. As discussed earlier in this Chapter, the funding crisis at Northern Rock was one of the availability of liquidity.[234] During our inquiry we examined whether a more generous liquidity regime could have prevented the run at Northern Rock, and supported Northern Rock through the closure in markets.

92. When asked whether Northern Rock might have avoided falling into trouble if the liquidity approach adopted by the European Central Bank (ECB) had been applied by the Bank of England, Mr Applegarth said that "within Europe there are a number of business models that actually have a greater dependence on wholesale funding than we do and they have not had the same issues we have had, so I would suspect so, yes".[235] The assertion that some European retail banks were more dependent on wholesale funding than Northern Rock was, however, called into question by what we learned at the ECB. The view from the ECB appeared to us to be that no Euro-zone bank was as dependent on wholesale funding as was Northern Rock.

93. Mr Sants told us that "it clearly is the case that if liquidity in smaller amounts had been made available to Northern Rock earlier, then it is quite possible it would not then have subsequently needed to apply to the lender of last resort facility".[236] The BBA considered that "had the Bank acted in this vein [of accepting a wider collateral base] at the beginning of August, then many of the problems affecting the money markets in general and Northern Rock in particular might have been mitigated".[237]

94. The Governor of the Bank of England dismissed the suggestion that a market-wide liquidity intervention could have assisted Northern Rock. He told us that:

You could ask whether the market could have been the lender of last resort for Northern Rock. I think the only circumstances in which that would have been feasible would have been when we had gone back to normal circumstances and banks had already financed the taking back onto their balance sheets of the conduits and vehicles that they now expect, over a period, to take back onto their balance sheets and were once again in a frame of mind to be willing to lend to others who had illiquid assets. To go back to those circumstances quickly and get back to where we were in July would have meant injecting a massive amount of liquidity. The Federal Reserve and the ECB have gone nowhere near that far at all.[238]

This point of view was supported by Professor Buiter. Responding to the suggestion that market wide injections of liquidity could have helped Northern Rock by helping the overall market, he stated that:

That would take an enormous amount of money injections. We know for instance that despite all the money that the Fed and especially the ECB have put into these longer terms markets, the actual spreads of three months LIBOR and the euro equivalent and the dollar equivalent over the expected policy rate is no smaller in euro land today than it is here, so it really may take a large injection of liquidity to get an appreciable result if the market is really fearful.[239]

Professor Buiter admitted that an injection of additional liquidity by the Bank "would have had a beneficial impact on the system" but doubted "whether it would have been enough to save Northern Rock".[240] Professor Wood agreed, saying "I do not see how giving a small amount of liquidity earlier to Northern Rock would have been much help since the problem, as we have seen, has been the shortage of a large amount of liquidity".[241] The Chancellor of the Exchequer accepted the Governor's argument against increasing overall market liquidity in order to help Northern Rock. He told us that:

Bear in mind that, as of about a week ago, they [Northern Rock] 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.[242]

95. We cannot know whether an open market liquidity operation of the kind asked for by a number of banks in August would have prevented Northern Rock's need for emergency support from the Bank of England in September. It is most unlikely that any such lending operation in September, following the stigmatisation of Barclays which we deal with later, could have been of a sufficient scale to ensure that Northern Rock could have received the liquidity it then required. Such an operation would also have raised severe 'moral hazard' concerns, signalling to the banking sector as a whole that public sector support would be made available in the event of any bank facing distress.

A U-turn by the Bank?

96. As we have already noted, the Bank of England liquidity support facility for Northern Rock was formally announced on 14 September 2007, after its premature disclosure by the BBC on 13 September 2007. Around this time, the spread between 3-month interbank rates and 3-month expected policy rates remained unusually high (see chart 3). On 19 September 2007, the Bank of England announced that it planned to "to conduct an auction in which it [would] provide funds at a 3-month maturity against a wider range of collateral, including mortgage collateral, than in the Bank's weekly open market operations".[243] Representatives of the Bank of England then came before us on 20 September 2007 to give evidence. When asked why this apparent change of policy had occurred, with the Bank of England now offering lending at a longer maturity against a wider range of collateral, the Governor said:

the balance of judgment between how far you extend liquidity against a wider range of collateral on the one hand and being concerned to limit the moral hazard on the other, to limit the ex post insurance, is a judgment that we are making almost daily in the febrile circumstances of the time. The operation announced yesterday was carefully designed and judged. It does not give ex post insurance, it is limited in size, it is limited in amount to each individual bank, and that provides a strict limit on the extent to which there is some ex post insurance, so we have balanced the concerns about moral hazard against the concerns that arose at the beginning of this week about the strains on the banking system more generally.[244]

However, the 'penalty' rate of interest was maintained. The Governor explained the reasoning behind this:

I think that is appropriate and it is appropriate because of the circumstances in which we are providing it, with the realisation of risks that the banks themselves took in full knowledge of what the consequences would be. The one thing I would like to say at the end is if these same problems were seen in the banking system today and they had been the result of some completely different cause, say a major terrorist attack, we would be injecting liquidity at absolutely zero cost because that would not be the result of the risks that the banks themselves took. The reason for the penalty rate now is not a punishment it is not to blame anybody; it is simply to make sure that when people think about the risks they are taking in the future they do so in the knowledge that it is costly to take risks.[245]

97. The fact that the European Central Bank accepted a wide range of collateral, including relatively illiquid assets, certainly assisted European banks, throughout the period of turmoil. The broadening of acceptable collateral by the Bank of England in September similarly assisted UK banks. The Governor depicted the Bank's decision as being finely balanced between giving the banks the liquidity they wanted and moral hazard. If the Bank were always to accept a wider range of collateral, banks would have an incentive to alter their asset portfolios away from the safest classes and towards higher-risk classes, and we consider this moral hazard argument to be important. Nevertheless, with the benefit of hindsight, we have concluded that the Bank of England should have broadened the range of acceptable collateral at an earlier stage in the turmoil.

98. The usual penalty rate was charged on the 3-month operation announced on 19 September. The penalty rate should not be viewed as a punishment for recalcitrant banks, but rather a reminder to banks to manage their liquidity risks in an appropriate manner.

Possible reform to the Bank's standing facilities

99. Professor Buiter suggested that one potential response to the problems at Northern Rock that the Bank of England might have made, would have been to change the requirements of its standing facilities. These standing facilities allow banks to borrow or deposit unlimited amounts at a rate 100 basis points above the Bank's main policy rate, with the Bank accepting as collateral the same assets as it does for its other routine money market operations, namely UK and foreign government bonds. Professor Buiter proposed that the Bank should extend the list of collateral acceptable for the standing facility, in order to permit borrowing by banks against more illiquid asset classes:

"When [the Bank of England] created the Liquidity Support Facility for Northern Rock they created what the Bank's discount window [standing facility] should have been all along—something that lends against illiquid collateral and also lends for longer periods, because the Bank discount window is only for overnight lending".[246]

Professor Wood, however, added a cautionary note to Professor Buiter's suggestion:

I do not think it is necessarily correct that we should want to give liquidity support to an individual institution if the rest of the market is in good order. That suggests that individual institution is fundamentally deficient and should be closed. The lender of last resort operation should go to the market as a whole when the market is short of liquidity. If an individual institution needs it, and the rest of the market is fine, there is something wrong with that institution.[247]

100. The Bank of England is reviewing, over the next year and in consultation with banks, the other Tripartite authorities and other central banks, elements of its money market operations.[248] We recommend that the Bank of England, in its response to this Report, set out the rationale behind the design of its standing facilities, and any changes to them that it is considering making.

UK banks' access to foreign central banks

101. Although banks are regulated and supervised at the national level, many banks conduct their business across borders, and some have access to the credit supplied by more than one central bank. Typically, a bank will be able to gain access to central bank funding in any country in which they operate. Thus, a UK-registered bank with operations in the Euro-zone would have been able to access ECB funding throughout the turmoil and take advantage of the ECB's more generous collateral requirements, and its willingness to adjust the timing of its credit supply. Many UK-registered banks do have such access to the ECB lending facilities, although the ECB told us that there had been no significant change to these banks' borrowings during the period of turmoil. When Northern Rock encountered funding difficulties, one possible solution might have been to make use of ECB liquidity, via the Northern Rock operation in Ireland.[249] Northern Rock did not do this, however, and Mr Applegarth outlined the problems in achieving such a funding stream:

We have a branch across in Ireland and had we had more time, we might have been able to put in place the legal documentation and provide the collateral through the Irish branch. The trouble is that would have taken two or three months … I think it would have been a gamble to have relied on getting documentation and collateral in place through the Irish branch. Had we done that a year ago, then we would have been able to do that, but we had not.[250]

Mr Sants, the Chief Executive of the PSA, explained why it might have been worthwhile for Northern Rock to approach the ECB. He said that "If [Northern Rock] had been set up to access the ECB liquidity provision it could have tendered different types of collateral to that which it would have been able to so do in the UK".[251] Professors Wood and Buiter supported the appropriateness of Northern Rock looking to this funding stream.[252] Professor Buiter encouraged all British banks capable of arranging the facilities to ensure they had funding lines not only from the ECB, but also from the US Federal Reserve.[253] Professor Wood told us that it was prudent from the point of view of individual banks to ensure such funding arrangements were available from "other central banks [that] give out liquidity too generously".[254]

102. The BBA argued for greater coordination between central banks on the range of collateral that each accepts:

We believe that a range of additional instruments such as sterling certificates of deposit (CDs) and commercial paper (CP) should be accepted in the weekly and monthly money market operations, and that the Bank should also review the range of collateral, including non-Sterling, it is prepared to accept during stressed conditions, both as to the type of instrument (eg mortgage backed securities), and to maturity … Ensuring greater consistency between the range of collateral that can be deposited with the central banks in the major financial centres (the Bank of England, the Bank of Japan, the ECB, and the US Federal Reserve) is also desirable from this perspective.

103. There are many circumstances where UK banks might be able to participate in money market operations conducted by the European Central Bank and the US Federal Reserve, although the fact that such operations would neither be conducted in sterling, nor accept sterling-denominated collateral, is a significant obstacle to UK banks extending their use of these facilities. In these circumstances, the Bank of England's policy on money market operations cannot be reviewed in isolation from those of other central banks. In view of the fact that some, but not all, UK banks have access to the money market operations provided by foreign central banks, the review of the Bank of England's money market operations should be informed by an awareness of the case for closer alignment of the Bank of England's money market operations with those of the European Central Bank and of the Federal Reserve.

STIGMATISATION

104. An increasing problem faced by financial institutions in their use of central bank funds has been that of 'stigmatisation'. Stigmatisation occurs where individual financial institutions fear damage to their reputations from accessing special operations, such as the Bank of England's 3-month term auction announced on 19 September, because application for the funds might mark out that institution as weak in some way, and therefore a poor counter-party risk.

105. The problem of stigmatisation crystallised in August, when it was reported that a major UK clearing bank had need to call on the Bank of England's standing facilities on two separate occasions. The clearing bank borrowed £314 million on 20 August and a further £1.55 billion on 29 August, at penalty rates, and found itself the centre of intense scrutiny as investors and the media searched for signs of weakness following the start of the turmoil in the capital markets. In this case, the use of the standing facility appears to have been unrelated to any overall liquidity issues, instead being the result of a technical breakdown in the system used by banks to clear and settle money market transactions. A member of the bank's staff was reported as saying "in these challenging times the dramatisation of such situations is of no help to markets, their members or their customers".[255] The Chancellor of the Exchequer drew attention to the "feverish speculation" surrounding these incidents:

You may remember at that time that another large bank had, for wholly technical reasons, borrowed money from the Bank of England overnight simply because the settlement system had not cleared everything, and there was no end of speculation. Remember, there was a lot of feverish speculation at that time and people were phoning up banks on a daily basis, saying, 'Have you been to the Bank of England?', so we are not talking about the comparative calmness we have got now, but we were talking about a very feverish time.[256]

The British Banker's Association noted its concern about the wider issue of the stigmatisation of all unusual borrowing from the Bank of England, stating that:

We are also concerned about the adverse publicity which now accompanies any application for borrowing from the Bank of England. This stigma should be removed by separating the Bank's day to day lending from its crisis management role. The Bank of England should recognise the need at times to strike the right balance between transparency and confidentiality in order to maintain an orderly market.[257]

106. The fear of stigmatisation may well have been one of the reasons why the Bank of England received no bids at all for its term auctions held on 26 September and 2, 10 and 17 October.[258] But stigmatisation is not a problem unique to the UK. In our recent visit to the United States, stigmatisation was also raised as an issue for policy-makers there. The Governor of the Bank of England confirmed the global nature of the problem to us, stating that:

A key lesson that central banks around the world have taken from the recent turmoil is that, in stressed conditions, any bank that is seen to come to the central bank to borrow—whether in regular standing facilities against high-quality collateral or against wider collateral in a discount window or support operation—can become stigmatised in the market. It important that, in future, banks have a means of accessing the central bank when necessary. So over the next year, and in consultation with the banks, the other Tripartite authorities and other central banks, we will be reviewing this element of our money market operations. In due course we shall publish a revised 'Red Book' that describes our operations in the sterling money markets.[259]

107. 'Stigmatisation', whereby financial institutions will not approach the central bank for assistance for fear of being regarded by the market as weak, appears to be a substantial problem in money markets across the world. Although this problem is not unique to the UK, we recommend that the Bank of England place particular emphasis, in its further reforms of its money market operations, on measures to deal with stigmatisation.

The decisions on the "safe haven"

Overview

108. On 16 August, Northern Rock began its pursuit of a "safe haven", acting "behind the scenes" and with its advisers to encourage an offer for the company to be made.[260] In accordance with its responsibilities under the Memorandum of Understanding, the FSA "encouraged and closely monitored discussions that took place between Northern Rock and potential acquirers".[261] The FSA set out "the requirements from a potential bidder that would have to be satisfied" and "what would have to be done if a private sector solution was to be pursued".[262]

109. Two institutions showed an interest in acquiring Northern Rock. One only showed "a slight expression of interest … that never came to anything".[263] The second institution, which was a major high street retail bank,[264] showed "more specific interest" for a period of two or three days, but no firm offer was made.[265] Northern Rock ceased its pursuit of a "safe haven" on Monday 10 September.[266] The discussions prior to the abandonment of this option were the subject of conflicting evidence.

THE FINANCIAL SUPPORT REQUIRED

110. The first conflict in evidence relates to the nature of the financial support required by the high street bank that considered making an offer for Northern Rock. Mr Applegarth implied on several occasions in evidence that the lending facility sought by the potential buyer was similar in nature to the support facility subsequently granted by the Bank of England to Northern Rock itself. First, he referred to the possibility of the facility being "granted to a major high street retail bank ahead of us having to get the facility".[267] Second, he stated that that bank wanted "a backstop facility in case the markets remained closed for X months to make sure they had sufficient liquidity to cover the liquidity issues we had".[268] Third, he said that "a facility similar to the one we got was not available to the main high street bank at the time".[269] Mr Applegarth also indicated his belief that the Bank of England had refused the request for financing, and criticised the decision to refuse such financing.[270]

111. The Governor of the Bank of England stated that the request was in the form of "one pretty vague telephone call, which came to Bank officials and then passed to me, originating in [the] FSA".[271] The Governor confirmed that he had not been party to conversations between the FSA and the potential bidder for Northern Rock.[272] The Chancellor of the Exchequer stated clearly that the financial support requested was in the form of a loan, which "could have been as much as £30 billion … to be given at commercial rates by the Bank of England".[273] The Governor also described the request as one to "borrow about £30 billion without a penalty rate for two years".[274] Both the Chancellor of the Exchequer and the Governor indicated that they had an instinctive reluctance for the Bank of England to act as commercial lender to a going concern.[275]

112. The Chancellor of the Exchequer and the Governor also told us that there was a potential legal barrier to the provision of the financial support that was enquired about. The Governor received legal advice that such lending on commercial terms would constitute State aid under European Community competition law.[276] Both he and the Chancellor of the Exchequer concluded that, were such lending to be made available to one high street bank, a matching facility would also have to have been offered to other potential bidders.[277] The Governor advised against accepting the financing request; the Chancellor accepted that advice, and the tentative approach was not followed by a formal offer.[278]

How smoothly a takeover could have been accomplished

113. The Governor of the Bank of England laid great stress on the legal difficulties faced in modern circumstances in accomplishing a smooth takeover of a bank that is a quoted company:

The first way [the Bank of England] might have dealt with [the problems at Northern Rock] was to invite the directors of Northern Rock and prospective purchasers into the Bank or the FSA for a weekend to see if that could be resolved and a transfer of ownership agreed over the weekend such that the depositors in Northern Rock would have woken up on Monday morning to find themselves depositors of a larger and safer bank. That is not possible because any change of ownership of a quoted company—and Northern Rock is a quoted company—cannot be managed except through a long and prolonged timetable set out in the Takeover Code.[279]

He subsequently added that "whatever accelerated deal one tries to bring about, the shareholders must be given proper time to consider a bid and others must be given a chance to make their counter bids".[280] During the period when bids were under consideration, he argued that depositors might be tempted to withdraw their funds.[281] The FSA also stated that any takeover "would have been done in the conventional fashion through the normal framework".[282]

114. Mr Applegarth was firmly of the view that the initial stages of a takeover could have been accomplished more smoothly and could therefore have prevented a run. First, he said that the run "would not have taken place, in my view … if we had been able to announce an offer with a big retail brand".[283] He subsequently said:

Clearly it would have been impossible to get a completed transaction over a weekend, but it is my view that, had you had an announceable offer over the weekend with a major high street brand, that would have provided sufficient confidence so a run did not happen.[284]

115. The Governor of the Bank of England gave a somewhat different picture of what would have happened in such circumstances, drawing upon his conclusion that any financial facility to one potential buyer would have to have been made available to other potential buyers:

The idea that if [the Chancellor of the Exchequer] stood up and said, 'I am willing to lend £30 billion to any bank that will take over Northern Rock'—that is not the kind of statement that would have helped Northern Rock one jot or tiddle. It would have been a disaster for Northern Rock to have said that.[285]

CONCLUSIONS

116. The FSA, the Governor of the Bank of England and the Chancellor of the Exchequer all indicated that they actively sought or favoured a solution to Northern Rock's problems prior to the run through a private sector takeover. The Chancellor of the Exchequer stated that a merger "would have been by far the best option".[286] However, witnesses from each of the Tripartite authorities were equally adamant that no firm offer was made.[287] While an indicative approach was clearly made, this was subject to the provision of a support facility, which the Tripartite authorities were not prepared to provide at that stage. The Chancellor of the Exchequer concluded that, "as the days went by, it was increasingly obvious that people just did not want to know".[288]

117. Professor Buiter strongly supported the Chancellor of the Exchequer's rejection of an offer based on a large loan on commercial terms to a potential private sector buyer: "They [would not be] protecting financial stability. They would be protecting the shareholders of the company wishing to take over Northern Rock."[289] He also remarked that:

If it is true that they wanted up to … £30 billion, in continued financial support to finance a takeover, then I think the Treasury and the Bank—this was a joint decision—were absolutely right to refuse it. This would be the socialisation of banking, and that might be a good idea but I do not think that is what this was about.[290]

118. With the benefit of hindsight, the financial support enquired about by a potential buyer of Northern Rock prior to 10 September may conceivably have represented a better deal for the taxpayer than the financial support that has been provided since 14 September. Unfortunately we received conflicting evidence from Northern Rock and the Tripartite authorities over the details of the support facility requested by the potential bidder for Northern Rock. This unresolved conflict prevents us from drawing any firm conclusion on whether a safe haven was possible. What also remains unclear is how proactive the Tripartite authorities were in pursuing this option. Clearly the amount and type of State aid was a major factor but equally so was the question of whether the Takeover Code inhibited Tripartite attempts to facilitate a private sector solution for the troubled bank. In any event, it needs to be borne in mind that the consequences of any announcement that might have been made relating to a potential takeover would have been unpredictable. Furthermore, it is not evident that the State could, or should, underwrite a safe haven option, where a single, presumably profitable, bank received State support (in the form of a lending facility) to undertake, or at least announce the takeover of Northern Rock.

The support operation, the run and the guarantee

The decision in principle on support

119. On Monday 10 September, Northern Rock abandoned its attempts at securitisation and its pursuit of a "safe haven".[291] Discussions about the Bank of England support option had already taken place before this time. The idea had been mooted when the then Chairman of Northern Rock spoke to the Governor of the Bank of England on 16 August.[292] Northern Rock envisaged the operation as a "backstop" facility that would only be drawn down should the other possible funding avenues—in other words, Northern Rock's own actions by securitising its debt or Northern Rock obtaining the "safe haven" of a takeover by a major retail bank—prove inaccessible.[293] It appears that a decision in principle that Northern Rock would be granted a support facility should neither securitisation or a takeover prove possible was taken at a meeting between the Chancellor of the Exchequer, the Chairman of the FSA and the Governor of Bank of England on Monday 3 September.[294] The final decision was that of the Chancellor of the Exchequer, but his decision was taken on the basis of a joint recommendation of the Governor of the Bank of England and the Chairman of the FSA.[295]

120. An insight into the likely basis of the advice given to the Chancellor of the Exchequer in early September was provided by the Governor's evidence to us on 20 September. On that occasion he drew attention to two substantial weaknesses in the legal framework for dealing with failing banks as it stood at that time. First, were Northern Rock to be unable to honour its funding commitments, depositors would not receive their deposits in full beyond £2,000, with only 90% of funds being reimbursed between £2,000 and £35,000.[296] Second, in the event of Northern Rock being declared insolvent and entering into administration, depositors would find their funds frozen, with the prospect of a long delay before their deposits were (even in part) reimbursed.[297]

121. We consider the weaknesses of the existing legal framework for handling failing banks, and why those weaknesses were allowed to persist, later in this Report.[298] At this stage, we are only concerned with the decision that the Chancellor of the Exchequer faced in early September. He was faced with the clear weaknesses in the framework for handling failing banks as it then stood. He was also conscious that, had Northern Rock been allowed to fail, there was a substantial risk that the spectacle of depositors unable to access their funds in Northern Rock would lead depositors with other banks to lose faith in the banking system as a whole, the so-called "contagion" effect:

The reason that we decided to offer lender of last resort facilities was because we believed that there was a wider systemic risk to the financial system. Now, that is the only consideration and that has always been the case as far as lender of last resort facilities are concerned, and I believed there was a serious risk of contagion and, therefore, we offered that support … I do not agree with … the proposition that we should have let the bank go under.[299]

122. The Chancellor of the Exchequer's decision in the first half of September to make a support facility available to Northern Rock should the need arise was the right one. Had he chosen not to do so, there would have been a significant risk of substantial disadvantage to Northern Rock depositors and a very real prospect of "contagion", whereby the public would lose confidence in the security of holdings across the United Kingdom banking system. In view of the weaknesses of the legal framework for handling failing banks at that time, the Tripartite authorities were right to view Northern Rock as posing a systemic risk. Had any other decision been taken, it is quite possible that the events that unfolded from mid-September onwards could have been more damaging to consumers and to the United Kingdom financial system than those that have actually taken place.

CONSIDERATION OF A COVERT OPERATION

123. When he gave evidence to us on 20 September, the Governor of the Bank of England emphasised his personal preference for a covert support operation. Having previously explained why a weekend takeover was not possible—a matter we considered earlier—he went on to say:

The second way in which the Bank would have preferred to do it in years gone by, and did do it in the 1990s, and the way that I would have wanted to do it on this occasion, is to have acted covertly as lender of last resort, to have lent to Northern Rock without immediately publishing that fact, publishing it after the operation had been over so that you and others could hold us accountable for the operation itself.[300]

At the same session, he also confirmed that a covert operation was his "first preference" and that he had "pressed strongly for the ability to conduct a covert operation", but had been advised that it was not possible.[301] Sir Callum McCarthy also told us that a covert operation "would have had some attractive features", but "was not a practical possibility".[302] The idea of a covert operation was abandoned on Tuesday 11 September, the day after it became evident that prospects of a private sector solution had failed and that a support operation would be necessary.[303] Witnesses identified two factors which acted as obstacles to such a covert operation—the requirement upon the Board of Northern Rock to make an announcement to the stock market about their situation and the practical difficulties associated with the possibility of a leak of a covert operation.

124. Northern Rock was a public listed company and, as such, had obligations to disclose relevant information to the stock market. Its last formal announcement to the stock market had been made in late July when Northern Rock's mid-year results were announced. These included an increased dividend and a seemingly healthy financial position, at least in relation to capital adequacy.[304] Sir Ian Gibson indicated that the Board was very conscious of its legal position in relation to disclosure:

From … 14 August onwards … we consulted legal advisers, the UK Listing Authority, the FSA, later the Tripartite [authorities], in terms of what was appropriate to disclose at what point, either about other party discussions or about discussions with the Bank of England or about the trading circumstances of the company, and we are fully satisfied that we did follow the best advice and follow it to the letter.[305]

Sir Ian went on to say that consideration was given as to whether on-going discussions with the Bank of England about the support operation ought to be disclosed:

Once we were in discussions with the Bank of England, our guidance from all involved, including clearance with the UK [Listing Authority], was that those discussions be not made public because there are circumstances, and we have certainly seen the results of those circumstances, that mean it is not appropriate in the view of the listing authority or the FSA that certain of those discussions are taken to the market[306]

125. However, it appears that, at some stage, legal advice was received that the Board of Northern Rock would have a duty to disclose a support operation in the context of Northern Rock's wider financial condition soon after the operation was embarked upon. The Governor explained this first on 20 September:

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 [a covert operation] could not go ahead because of a legal responsibility to disclose. There is wording in that [European Union] 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.[307]

At times on that occasion, the Governor of the Bank of England appeared to imply that the legal position arising from the Market Abuse Directive was clear cut: "the ability to conduct covert support … is ruled out because of the Market Abuses Directive".[308] Later during the same session, he conceded that the relevant wording in the Directive was "ambiguous".[309]

126. The final decision that a covert operation was not legally possible was based in part on advice received by the Board of Northern Rock. Mr Applegarth told us:

We were in the process of taking legal advice about whether such a facility would have to be covert or overt. The Board had not actually made that decision but our advisers were, I think, giving us clear advice that it would have to be overt … The legal advice that we were getting [was] that it [the support facility] was most probably announceable.[310]

Sir Callum McCarthy also told us that, "in the particular circumstances, the Northern Rock Board took the view that they had to make an announcement".[311] This view was supported by the Governor of the Bank of England:

Northern Rock were very keen to make a public statement that they had the facility because their view was that they did not want the covert operation, they wanted it to be overt because they believed that the sign of reassurance of having a facility from the Bank of England would help them and, in fact, that is what would prevent a retail run in their view.[312]

127. Although legal advice about the duty to disclose was received by the Board of Northern Rock, both Northern Rock and the Bank of England indicated that the FSA had legal advice to the same effect, which was made available to the other Tripartite authorities. In reporting the legal advice given to the Board of Northern Rock, Mr Applegarth said that

The FSA told us that their view was the same. So both our legal advisers and the FSA came to the same guidance for us.[313]

When the Governor of the Bank of England gave evidence for the second time in December, he also emphasised that the FSA was the source of the decision that a covert operation was not possible:

The final resolution of whether there could or could not be a covert operation was reached on the Tuesday before the facility was given. It was a decision by the FSA, supported by the Tripartite legal advice, on two grounds, one under the listing requirement, which the FSA is responsible for, and Northern Rock's obligations as a listed company and, secondly, under the Market Abuses Directive, and we were advised by the FSA that under both it would require Northern Rock, not the Bank, to make a public statement to the fact that it had the facility … The legal advice was clear … It was the FSA's advice, but it was taken by the lawyers involved in the Tripartite arrangements. There were lawyers from all three bodies.[314]

The FSA's oral evidence implied a somewhat more passive role for the FSA and the legal advice of the Tripartite authorities, Sir Callum McCarthy stating that "we believed there was no legal basis for preventing" the Board of Northern Rock making a public announcement,[315] and "we saw no reason to disagree with the Board's view that it was necessary for them to make an announcement".[316]

128. A subsequent written submission from the Tripartite authorities clarified the relationship between legal advice for Northern Rock and the legal advice of the FSA:

It is in the first instance for a listed company to consider its disclosure obligations, in conjunction with its advisers. Within the framework of the Tripartite arrangements and the Financial Services and Markets Act 2000 it is the responsibility of the FSA as the UK Listing Authority to supervise listed companies in this respect … The question of whether Northern Rock, as a listed company, was subject to specific obligations to disclose was an issue for the company itself, and for the FSA as the UK Listing Authority. It was the view of the FSA that, once the company had obtained emergency liquidity support, an announcement would have to be made if the market was not likely to be misled, given previous statements made by the company. Hence there was no reason to dissent from the view taken by the directors of the company, on the basis of their own legal advice, that an announcement should be made.[317]

129. Since we first took evidence from the Governor of the Bank of England, some evidence has emerged that calls into question whether the Market Abuse Directive requires disclosure in the circumstances faced by Northern Rock. Professor Buiter told us that:

There is nothing in the … Market Abuse Directive to prevent covert support to banks in trouble. On the day [the Governor of the Bank of England] … said it, the statement was contradicted by a spokesman for the Commission, and every lawyer I have talked to since then says that they have no idea where that interpretation came from.[318]

130. Article 6 of the Market Abuse Directive states the following:

1. Member States shall ensure that issuers of financial instruments inform the public as soon as possible of inside information which directly concerns the said issuers …

2. An issuer may under his own responsibility delay the public disclosure of inside information, as referred to in paragraph 1, such as not to prejudice his legitimate interest provided that such omission would not be likely to mislead the public and provided that the issuer is able to ensure the confidentiality of that information …[319]

131. During our visit to Brussels in early January 2008, we were told by Commission officials that there was no intention that the Market Abuse Directive should act as a barrier to covert support operations. Indeed, our attention was drawn to part of Article 3 of the relevant implementing Directive which we were told was phrased partly in order to permit appropriate action:

Legitimate interests for delaying public disclosure and confidentiality … For the purposes of applying Article 6(2) of Directive 2003/6/EC, legitimate interests may, in particular, relate to the following non-exhaustive circumstances … negotiations in course, or related elements, where the outcome or normal pattern of those negotiations would be likely to be affected by public disclosure. In particular, in the event that the financial viability of the issuer is in grave and imminent danger, although not within the scope of the applicable insolvency law, public disclosure of information may be delayed for a limited period where such a public disclosure would seriously jeopardise the interest of existing and potential shareholders by undermining the conclusion of specific negotiations designed to ensure the long-term financial recovery of the issuer.[320]

132. The relevant provisions of the Market Abuse Directive and the implementing Directives have been implemented in United Kingdom law through changes to the FSA Handbook.[321] Rule 2.5.1 of the Disclosure and Transparency Rules within that Handbook transposes Article 6 of the Market Abuse Directive:

An issuer may, under its own responsibility, delay the public disclosure of inside information, such as not to prejudice its legitimate interests provided that:

(1) such omission would not be likely to mislead the public;

(2) any person receiving the information owes the issuer a duty of confidentiality, regardless of whether such duty is based on law, regulations, articles of association or contract; and

(3)the issuer is able to ensure the confidentiality of that information.[322]

Rule 2.5.2 of the Disclosure and Transparency Rules provides a commentary relating to the first proviso:

(1) Delaying disclosure of inside information will not always mislead the public, although a developing situation should be monitored so that if circumstances change an immediate disclosure can be made.

(2) Investors understand that some information must be kept confidential until developments are at a stage when an announcement can be made without prejudicing the legitimate interests of the issuer.[323]

Rule 2.5.3 of those Rules provides a word-for-word transposition of the commentary on negotiations relating to the financial viability of an issuer contained in Article 3 of the relevant implementing Directive cited above.[324]

133. Prior to implementation, the Treasury and the FSA said the following with regard to the above text:

Disclosure of inside information can, however, be delayed by issuers to protect their legitimate interests (such as during the course of negotiations), provided that the confidentiality of the information can be ensured during the delay and provided that such delay would not be likely to mislead the public.[325]

The Chancellor of the Exchequer noted in oral evidence that the "provisos" setting out the circumstances when an announcement could be delayed made the application of the exemption from disclosure hard to judge, [326] and went on to say:

There is some flexibility [under the Market Abuse Directive] provided you can keep it confidential, and in today's world that is a big ask maybe, and the second thing is that you have got to be sure that you are not misleading people. Well, you have to ask yourself the question: when do you get to the stage where you might be doing the misleading? … On one view, there is sufficient flexibility in the Market Abuse Directive to do that [conduct a covert operation], provided, I think I am right in saying, that you can be assured it is kept confidential, but again that is difficult, and also that you are not actually misleading people.[327]

134. In the context of the legal position regarding disclosure, the Chancellor of the Exchequer emphasised the importance of the advice received by the Directors of Northern Rock that they would need to issue a profit warning or at least make a statement to the public markets.[328] The Chancellor indicated that the Market Abuse Directive itself was not a material factor in his own conclusion that a covert operation would not be possible.[329]

135. By the time of his second appearance before the Committee in December, the Governor of the Bank of England acknowledged that "I gather now that at least on the Market Abuses Directive there is still a difference of view between some interpretations in the UK and some in Brussels but also some differences in interpretation between the original advice we had and the current advice that is being received".[330]

136. A written submission from the Tripartite authorities in mid-January 2008 appeared to support the Governor's initial emphasis on a clear-cut interpretation of the Directive. That submission described the provisos that we have quoted above relating to confidentiality and not misleading the market as "two overriding conditions" and states that, "as the Directive is currently drafted, neither of these conditions can be waived or disapplied".[331] The submission also states:

News that a financial institution's financial position is such that it requires emergency liquidity support from the Bank of England is capable of constituting inside information as it is information which could have a significant impact on the institution's share price. Unless the conditions for delaying a disclosure are met, the information would in that case need to be announced to the market as soon as possible.[332]

The view of the FSA, that we have previously cited, was that, "once the company had obtained emergency liquidity support, an announcement would have to be made if the market was not likely to be misled, given previous statements made by the company".[333] In other words, the FSA's view as Listing Authority was that the emergency liquidity support operation could not be covert on the grounds of the overriding condition relating to misleading the public, regardless of whether or not the information was capable of being kept confidential.

137. On the basis of the texts cited in the preceding paragraphs, we accept that the provisions of the Market Abuse Directive and the implementing Directive relevant to market disclosure in the case of Northern Rock in September 2007 were properly transposed into United Kingdom law. It is evident from the texts of both the Directive and of the FSA Handbook that any decision to delay disclosure, even in the case of an issuer that is in grave and imminent danger, is subject to provisos relating to the need for the issuer to be satisfied that such a delay would not be likely to mislead the markets and that the issuer is able to ensure the confidentiality of that information. The Governor of the Bank of England received legal advice through the FSA from lawyers working for the Tripartite authorities indicating that the Market Abuse Directive was a barrier to a covert operation, even if information could be kept confidential, and, as such, the Governor was justified in regarding the legal interpretation of the Market Abuse Directive shared by the Financial Services Authority and Northern Rock's legal advisers as a material factor in consideration of a covert operation, although it was not necessarily the leading factor in the final decision that a covert operation was not possible.

138. In explaining why a covert operation did not prove possible, several witnesses indicated that the foremost considerations in their minds were ones of practicality. Echoing views expressed by Sir Callum McCarthy,[334] Mr Sants told us:

We are expressing a view that it seems unlikely in the overall set of circumstances that prevail in the market-place today that keeping an operation of this size and complexity covert for any length of time is realistic, independent of the standing of the Market Abuse Directive.[335]

Mr Applegarth was of a similar view:

because there were so many people involved, in practical terms, it [the support operation] would have leaked … I think that is a pretty strong probability.[336]

He also emphasised that the leaking of a covert operation had the potential to be more damaging than the premature disclosure of an overt operation.[337]

139. On both the occasions that he gave evidence, the Chancellor of the Exchequer indicated that he was always sceptical as to whether a covert operation could remain confidential in "today's market conditions".[338] He emphasised the "feverish speculation" which existed in late August and early September 2007, when, for example, an acknowledgement by a major clearing bank that it had used the Bank of England's standing facility had caused a sharp fall in that company's share price.[339] He also informed us that he did not seek or take legal advice because he judged a covert operation impossible. As he summed up his position, "My belief was that there was every chance that this was going to leak and I was dead right".[340]

140. The Governor of the Bank of England, in his second appearance before us, appeared to accept that the practicality of a covert operation was in doubt. He told us that "I think, from my conversations with central bankers from around the world, they are very conscious of this case [the Northern Rock crisis] and they recognise that, irrespective of what the law says, in practice now it may be extremely difficult for lender of last resort operations to be conducted in the covert way that they were even in the early 1990s".[341]

141. In the circumstances of Northern Rock in early September 2007, the barriers to a covert support operation were real. Any large scale support operation for Northern Rock would have become known to many market participants. In the febrile and fevered atmosphere of that period, media speculation would have followed. The leaking of news of a support operation that was intended to remain covert for a period of time would have been potentially as damaging as the premature disclosure of an overt operation. The practical risks of a leak are linked to the legal difficulties, insofar as covert support operations only appear to be permitted under the Market Abuse Directive in instances when the issuer can be assured of confidentiality. We consider later in this Report whether there are circumstances when a covert support operation should be considered in future, and what legal and other changes might be necessary to facilitate such an operation.

142. However we also find it unacceptable that the possibilities for covert action had not been properly considered much earlier. Had this issue been clarified, the authorities could have reacted with more despatch which in itself might make covert action a more realistic option. We return to the state of readiness of the authorities and "war gaming" later in this Report.

PREPARATIONS FOR THE ANNOUNCEMENT

143. By Monday 10 September it was evident that a Bank of England support operation for Northern Rock would be necessary. On that day, Sir John Gieve spoke for the first time to the then Chief Executive of Northern Rock about the proposed facility.[342] By the following day, it was apparent that that operation would need to be publicly announced.[343] The succeeding days saw preparations put in place for legal agreement on the operation and for handling the announcement and its consequences.[344] The Chancellor of the Exchequer argued that the practical arrangements for the emergency liquidity operation were undertaken rapidly:

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.[345]

144. It was initially decided to announce the support operation on Monday 17 September.[346] The Chancellor of the Exchequer implied that this initial timetable reflected the wishes of Northern Rock itself.[347] Witnesses from Northern Rock and the FSA confirmed that Northern Rock's plan was to use the time prior to an announcement on Monday to increase the bandwidth of Northern Rock's website and to make other arrangements for handling customers and others affected by the announcement.[348]

145. The plan to announce the support operation on Monday 17 September was only abandoned on the afternoon of Thursday 13 September, in circumstances we consider in the next paragraph.[349] In October, with reference to this initial timetable, the Chancellor of the Exchequer agreed that "it would have been astonishing if you could have kept that [the support operation] quiet for a week".[350] In view of the role that fears of a leak of a support operation had played in the decision on Tuesday 11 September that a covert operation was not possible, the Tripartite authorities were unwise initially to accede to Northern Rock's request for the announcement of the support operation to be delayed until Monday 17 September. In the light of subsequent events, it seems evident that the Tripartite authorities and Northern Rock ought to have strained every sinew to finalise the support operation and announce it within hours rather than days of the decision to proceed with the operation. A swift announcement would have been assisted by early preparation of such an announcement. In that context, we find it surprising that high level discussions between the Bank of England and Northern Rock about the support facility did not take place prior to 10 September.

146. On the afternoon of Thursday 13 September, according to the Governor of the Bank of England "rumours in the market started" in relation to the proposed operation.[351] At 4.00 pm on that day, the Tripartite standing committee met at deputies level and decided to bring forward the announcement of the operation to 7.00 am on Friday 14 September.[352] The Court of the Bank of England met on the evening of Thursday 13 September.[353] The terms of the emergency liquidity assistance were finalised in the early hours of Friday 14 September.[354] The announcement was made at 7.00 am that morning in the following terms:

The Chancellor of the Exchequer has today authorised the Bank of England to provide a liquidity support facility to Northern Rock against appropriate collateral and at an interest rate premium. This liquidity facility will be available to help Northern Rock to fund its operations during the current period of turbulence in financial markets while Northern Rock works to secure an orderly resolution to its current liquidity problems … The FSA judges that Northern Rock is solvent, exceeds its regulatory capital requirement and has a good quality loan book.[355]

THE LEAK AND ITS EFFECTS

147. Before the provision of emergency liquidity assistance by the Bank of England to Northern Rock could be announced formally, the outlines of the operation were reported by the BBC—at 8.30 pm on BBC News 24 and then on other BBC media outlets.[356] Several witnesses argued that the premature disclosure of the support operation in this way was instrumental in the run that followed. Mr Applegarth said that the leak "caused immense difficulties".[357] He thought that "it was the announcement of the facility being leaked that actually was the start of the run".[358] The Chancellor of the Exchequer characterised the leak as "clearly very unhelpful".[359] Sir Callum McCarthy told us:

It was extremely unfortunate that the information leaked because it meant that instead of this being put in place as, 'This is a solvent institution which has a cash flow problem and the Government is stepping in to make sure that it is saved', it became a panic measure or a response to something that was already in the making. Panic was how it was seen.[360]

148. In explaining the impact of the disclosure both the then Chairman and the then Chief Executive of Northern Rock contrasted the impact of that disclosure with the likely impact of a planned announcement the following Monday. Dr Ridley said:

Had the leak not happened and we had been able to announce on the Monday the facility with the Bank of England in a measured fashion, with full communication plans in place, undoubtedly there would have been some concern—a lot of concern—to many of our customers but we think it would have been considerably less than it was in the way that it came about.[361]

Mr Applegarth endorsed this view: "I think the chairman is right in that the probability of a retail run would have been lessened had we been able to do the announcement as we had intended on the Monday".[362] Witnesses from Northern Rock contrasted the effects of the leaked information about the emergency lending facility on the evening of Thursday with the possible effects of a planned announcement on Monday morning. As we have already seen, the planned announcement had been brought forward to the Friday morning even before the BBC reported the planned announcement. In failing either to make an announcement earlier in the week or to put in place adequate plans for handling press and public interest in the support operation, the Tripartite authorities and the Board of Northern Rock ended up with the worst of both worlds.

THE RUN ON THE ROCK

149. The run on deposits of Northern Rock which took place between Friday 14 September and Monday 17 September was the central element in the problems that Northern Rock has faced subsequently.[363] The speed and extent of withdrawals meant that the Bank of England's emergency facility, which had been envisaged as a "backstop", actually needed to be called upon almost immediately.[364] The run started on the evening of 13 September, following, in the Chancellor of the Exchequer's words, "the fairly dramatic news that a fairly well-known bank had gone to the Bank of England for help" and the run accelerated the following day.[365]

150. The run gathered momentum in part because of the difficulties encountered by Northern Rock customers in seeking to withdraw their money. Mr Applegarth attributed these difficulties in part to the fact that the support operation had been brought forward:

The probability of a retail run would have been lessened … had we been able to do the announcement as we had intended on the Monday, to be able to put facilities in place and also to actually improve our ability to get the money to the customers. One of the things we had intended to do over that weekend was to widen the bandwidth on the internet account so you would not have had so much frustration from our internet customers. We would have been able to get the money back to customers better.[366]

According to Sir Callum McCarthy, the Internet access provided by Northern Rock was "inadequate", although he emphasised that all those seeking to withdraw funds that way were successful in doing so.[367]

151. While most withdrawals were made through the Internet, by telephone or by post, the most enduring and damaging images of the run were those associated with queues outside Northern Rock's branches.[368] Northern Rock did not have a large branch network: it had 72 branches in total, and only four branches in London.[369] Many branches had only a couple of counters, because the bank did not normally conduct much of its retail business over the counter.[370] Because of money laundering requirements, large withdrawals could take up to 15 minutes to be completed.[371] These factors together explained why it did not take many customers to seek to withdraw their funds for queues to extend out of the front door and into the street—and into the public consciousness.

152. The Governor of the Bank of England indicated that, once the run had started, and in view of the weaknesses of the legal framework for handling banks in distress, other depositors were behaving rationally and logically in joining the run by seeking to take their money out also:[372]

Once the depositors of Northern Rock had heard the bad news and they suddenly realised that Northern Rock needed a lender of last resort facility—this is the problem with an overt operation—once they had seen that there was bad news about Northern Rock, and they could not possibly be reasonably expected to have been sitting at home thinking about the wholesale funding structure of Northern Rock, once they learned that there was concern about Northern Rock it is not that surprising that they thought perhaps it might be safer to take some money out.[373]

Mr Applegarth also had no criticism to make of Northern Rock's depositors:

I can understand readily the logic of somebody who has their life savings invested in an institution and who sees pictures of people queuing outside the door and they go and join that queue. That is quite a logical reaction.[374]

STOPPING THE RUN

153. The momentum of the run on Northern Rock deposits once it had begun was caused by two factors. First, depositors were becoming aware that, were the run to continue, Northern Rock would eventually cease to be a going concern.[375] Second, public awareness increased of something of which many depositors might previously been unaware—namely, that deposits above £2,000 were not guaranteed in full.[376]

154. In these circumstances, the Governor of the Bank of England stated that the only way to halt the run was to provide a Government guarantee of deposits in Northern Rock.[377] The Chancellor of the Exchequer "became convinced" on Sunday 16 September that action along these lines was necessary.[378] The announcement of the guarantee took place during a press conference after 5.00 pm on Monday 17 September that the Chancellor of the Exchequer held with US Treasury Secretary Hank Paulson. The Chancellor of the Exchequer informed the public that:

In the current market circumstances, and because of the importance I place on maintaining a stable banking system and public confidence in it, I can announce today that following discussions with the Governor and the Chairman of the FSA, should it be necessary, we, with the Bank of England, would put in place arrangements that would guarantee all the existing deposits in Northern Rock during the current instability in the financial markets. This means that people can continue to take their money out of Northern Rock. But if they choose to leave their money in Northern Rock, it will be guaranteed safe and secure.[379]

The announcement late on Monday 17 September had the desired effect. The momentum of the run was halted.[380]

CONSIDERATION OF THE GUARANTEE AND THE TIMING OF THE ANNOUNCEMENT

155. During our inquiry, we examined in detail the questions of when the Government guarantee of Northern Rock deposits was first considered, whether it should have been announced earlier and whether preparations of such an announcement could have been put in hand at an earlier stage.

156. Participants in the discussions surrounding the liquidity facility to Northern Rock. emphasised the difficulty that they faced in predicting the effect of its announcement. Sir John Gieve told us:

We knew when we did that that the announcement of that would have two effects: a good effect because it would show they had a new source of finance but a bad effect because it would send the market a signal that they really needed a new source of finance. In the event we knew that there was a risk that that balance would go the wrong way and it did.[381]

The Governor of the Bank of England told us that he did not view a bank run as "inevitable" on Thursday 13 September, when the date of the announcement of the support operation was brought forward because of market rumours:

The nature of a bank run is that it is a knife edge: it might happen, it might not. That is exactly why a bank run is so difficult to handle.[382]

He emphasised that the provision of the support facility might have had a reassuring effect on depositors,[383] and went on to say: "I do not think anyone could have known with any certainty at all what would have been the consequences on retail depositors of the announcement".[384]

157. Sir Callum McCarthy supported the view of the Governor of the Bank of England that the likely effect of the announcement of liquidity support was not "obvious".[385] The then Chairman of Northern Rock also emphasised the unexpectedness of the run:

I think it is worth reflecting that all of us, both here and in the authorities, were surprised by the degree to which the announcement of a facility from the Bank of England—not the use of it but the existence of a facility—and the reassurances that went with it about us being a solvent and profitable business did not have a sufficiently reassuring effect on customers.[386]

158. In view of the awareness apparent within the Tripartite authorities and within Northern Rock's Board that a retail run was one possible consequence of the announcement of the Bank of England's liquidity support, we asked witnesses from the Tripartite authorities about the extent to which a Government guarantee—the device that was used on Monday 17 September to halt the run—had been the subject of prior consideration.

159. Sir John Gieve implied in his evidence in September that the possibility of announcing a Government guarantee alongside announcement of the support facility was at least considered, and was consciously rejected:

In terms of the crisis, the key question that underlies your questions is was it worth on Friday announcing that the Bank was making a facility available or should we have said at the same time that the Government guaranteed all the deposits? We did realise there was a risk that, if you like, the shock effect of an announcement would overwhelm the positive effect of saying the Bank was standing by with some money. We knew that was a risk but we thought that it was not an overwhelming risk and it was worth taking that step.[387]

He reinforced the impression of prior consideration of the Government guarantee when he next gave evidence:

When we were planning the lender of last resort support we knew that it might not work and, if it did not, there would then be a choice between either, in a sense, guaranteeing all the deposits of the bank or, alternatively, allowing Northern Rock to go into administration, but we took the view that it was worth trying a classic lending operation first, because that offered the chance that Northern Rock would be able to get through the liquidity difficulties in the short-run and then resume normal operations after that.[388]

Mr Sants did not appear to attach great importance to the early discussions on the question of a Government guarantee: "I think I may have some vague recollection of it being mentioned by some working group discussion, but that is the extent of it".[389]

160. The Governor of the Bank of England was firmly of the view that it would have been "irresponsible" to announce a Government guarantee at the same time that the liquidity support was announced, commenting that, in such circumstances, "It would undoubtedly be said: 'Why on earth is this being done?'"[390] Sir John Gieve said that the decision not to offer a Government guarantee at the same time as announcing the support facility "was a Tripartite decision in which, I think, all three parties were at one".[391]

161. Once the retail run gathered momentum, the idea of Government guarantee was given fuller consideration by the Tripartite standing committee at the level of deputies.[392] Sir John Gieve indicated the timescale on which he considered such a guarantee emerged as an issue:

We did realise that offering a limited collateralised facility was not guaranteed to save Northern Rock. We hoped that it would restore confidence, and I think that was a reasonable judgment at the time, and other people commenting on it at the time thought so too, but I think we did not do enough to reassure the retail depositors, and that became clear on the Friday.[393]

Sir John had earlier implied that, in the light of subsequent events, the announcement of a Government guarantee might have been of benefit on that Friday: "If we had known it was going to be essential on Monday we might well have offered it on Friday but that was not certain at that stage".[394]

162. Although, according to Sir John Gieve, a unanimous "decision" had been reached by the Tripartite authorities not to announce a Government guarantee at the same time as the lending facility,[395] the Governor of the Bank of England and the Chancellor of the Exchequer both told us that they did not discuss the Government guarantee prior to Sunday 16 September, when discussions took place between those two and the Chairman of the FSA.[396] A decision was taken on that day by the Chancellor of the Exchequer to give the Government guarantee. He told us that consideration of the precise terms of the guarantee meant that an announcement was not possible before the markets opened on Monday 17 September, and so the final announcement was made after markets closed on that day.[397]

163. The Chancellor of the Exchequer argued in October that a decision would not have been possible earlier than the weekend:

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 … The guarantee itself was not an issue on the Friday morning when those queues started to build up.[398]

The Chancellor of the Exchequer reiterated this view in January,[399] and went further in questioning whether an earlier announcement of the Government guarantee would have had the same effect as did its subsequent announcement:

things were such on the Friday that I suspect that, no matter what I stood up and said in relation to a guarantee, you would still have had the queueing problem because what you had was a dramatic announcement, and this is something that has changed in the last 20 years with 24-hour news, and the queues started to form and the situation just got worse and worse and worse, and I think it was not actually until the Saturday that people started talking about guarantees.[400]

164. Professor Buiter took a rather different view:

If [the Tripartite authorities] were not quite convinced that the public would believe them—and in these days you cannot be sure of that—then the immediate creation of a deposit insurance scheme that actually works and is credible would have been desirable. To wait three days was again an unnecessary delay.[401]

165. We accept that the consequences of an announcement of the Bank of England's support operation for Northern Rock were unpredictable. There was a reasonable prospect that the announcement would have reassured depositors rather than having the opposite effect, particularly prior to the premature disclosure of the operation. However, after the premature disclosure of the support, and against the background of the market reaction to Barclays use of lending a fortnight earlier, it seems surprising that the issues were not urgently revisited. It is unacceptable, that the terms of the guarantee to depositors had not been agreed in advance in order to allow a timely announcement in the event of an adverse reaction to the Bank of England support facility.

166. The Tripartite authorities were conscious during the planning of the support operation that announcement of that operation might have an adverse effect. In light of this, we regard it as a serious error of judgement that the Tripartite authorities at deputies level failed to plan in advance for the announcement of a Government guarantee and failed to raise some of the issues surrounding such a guarantee with the principals prior to Sunday 16 September. We are also concerned that it did not prove possible to announce the guarantee that was decided upon that day before the markets opened the following day. The cumulative effect of these failures was to delay the guarantee until the evening of the fourth day after the run started and thus to make the run on the deposits of Northern Rock more prolonged, and more damaging to the health of the company, than might otherwise have been the case.

196   Q 391 Back

197   Q 1523 Back

198   Qq 568, 586-587 Back

199   Q 568 Back

200   Q 32 Back

201   Ibid. Back

202   Qq 200, 751, 754 Back

203   Qq 548, 574 Back

204   Qq 754, 756 Back

205   Q 754 Back

206   Qq 108, 200, 611 Back

207   Q 613 Back

208   Q 200 Back

209   Qq 571, 577 Back

210   Q 574 Back

211   See chapter 7. Back

212   Treasury Committee, oral evidence, Thursday 13 October 2005, The Monetary Policy Committee of the Bank of England: appointment hearings, HC (2005-06) 525-II, Q 50 Back

213   Treasury Committee, oral evidence, Thursday 13 October 2005 The Monetary Policy Committee of the Bank of England: appointment hearings, HC (2005-06) 525-II, Q 51 Back

214   29 June 2006 Bank of England May 2006 Inflation Report , HC 1185-i-ii, Q 81 Back

215   HC 568-I, Session 2006-07, 28 June 2007 Bank of England May 2007 Inflation Report, Q 23 Back

216   Qq 83-84, Ev 295 Back

217   Q 288 Back

218   Qq 295-6 Back

219   Ev 216 Back

220   Ev 217 Back

221   Qq 155, 157 Back

222   Ev 216 Back

223   Ibid Back

224   Press Release, Federal Reserve Board,http://www.federalreserve.gov/newsevents/press/monetary/20070817a.htm Back

225   Q 884 Back

226   http://www.federalreserve.gov/newsevents/press/monetary/20070918a.htm Back

227   http://www.federalreserve.gov/newsevents/press/monetary/20071031a.htm, http://www.federalreserve.gov/newsevents/press/monetary/20071211a.htm Back

228   The Bank of England has not always been so unwilling to flex its collateral requirements. In response to widespread financial panic and bank runs in 1825, for example, the Bank deviated from its normal practice and made advances on government securities, instead of limiting itself to the discounting of commercial bills, which, at the time, carried lower risk. Back

229   Q 854 Back

230   Q 856 Back

231   ibid Back

232   Q 770 Back

233   HC 139-I, Session 2007-08, Bank of England November 2007 Inflation Report, Q 18 Back

234   See Chapter 2 Back

235   Q 609 Back

236   Q 285 Back

237   Ev 296 Back

238   Q 3 Back

239   Q 873 Back

240   Q 879 Back

241   Q 873 Back

242   Q 764 Back

243   http://www.bankofengland.co.uk/markets/money/documentation/statement070919.pdf Back

244   Q 2 Back

245   Q 115 Back

246   Q 854 Back

247   Q 867 Back

248   Q 1608 Back

249   Q 585 Back

250   Q 585 Back

251   Q 331 Back

252   Q 882 Back

253   Q 884 Back

254   Q 884 Back

255   Barclays reassures after more borrowing, Financial Times, 31 August 2007 Back

256   Q 1769  Back

257   Ev 294 Back

258   www.bankofengland.co.uk/markets/termauctions/index.htm Back

259   Q 1608 Back

260   Qq 571, 732 Back

261   Q 257 Back

262   Q 322 Back

263   Qq 749, 754 Back

264   Q 588 Back

265   Q 754 Back

266   Qq 571, 577 Back

267   Q 588 Back

268   Q 614 Back

269   Q 680 Back

270   Qq 617, 579 Back

271   Q 1665 Back

272   Qq 1715-1717 Back

273   Q 789 Back

274   Q 1665 Back

275   Qq 789, 1665 Back

276   Q 1665 Back

277   Qq 1665, 789 Back

278   Qq 1665, 789 Back

279   Q 5 Back

280   Q 1672 Back

281   Q 107 Back

282   Q 258 Back

283   Q 579. See also Q 613. Back

284   Q 679 Back

285   Q 1665 Back

286   Qq 257, 3, 790 Back

287   Qq 324, 1665, 788 Back

288   Q 790 Back

289   Q 870 Back

290   Q 869 Back

291   Qq 577 Back

292   Q 574 Back

293   Qq 195, 488-490, 529 Back

294   Q 754 Back

295   Q 763 Back

296   Q 14. For the amounts available under the deposit protection arrangements at that time, see Q 345 and para 212. Back

297   Ibid. Back

298   See Chapter 5 Back

299   Q 1782 Back

300   Q 5 Back

301   Q 21 Back

302   Q 177 Back

303   Q 1620 Back

304   Northern Rock plc Interim Results, 6 months ended 30 June 2007 Back

305   Q 744 Back

306   Q 745 Back

307   Q 62. See also Q 109. Back

308   Q 14 Back

309   Q 21. See also Q 22. Back

310   Qq 621, 624 Back

311   Q 173 Back

312   Q 1650 Back

313   Q 621. See also Q 624. Back

314   Qq 1650-1651 Back

315   Q 173 Back

316   Q 175. See also Q 264. Back

317   Ev 218 Back

318   Q 889 Back

319   Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 on insider dealing and market manipulation (market abuse), Article 6, paragraphs 1 and 2 Back

320   Commission Directive 2003/124/EC of 22 December 2003 implementing Directive 2003/6/EC of the European Parliament and of the Council as regards the definition and public disclosure of inside information and the definition of market manipulation Back

321   Prior to the implementation of the Market Abuse Directive, the FSA had power under Part 6 of the Financial Services and Markets Act 2000 to make rules concerning the on-going obligations of companies whose securities are admitted to the official list. Its rules made under these powers are known as the Listing Rules. Schedule 1 to the Financial Services and Markets Act (FSMA) 2000 (Market Abuse) Regulations 2005 amends Part 6 of the FSMA to widen the FSA's rule-making powers so that they apply to companies whose securities are admitted to trading on EU-regulated markets based in the UK as well as those admitted to the official list: see HM Treasury, Transposition Note for Directive 2003/6/EC - The Market Abuse Directive. Back

322   FSA, FSA Handbook, DTR, Rule 2.5.1 Back

323   Ibid., Rule 2.5.2 Back

324   Ibid., Rule 2.5.3 Back

325   HM Treasury and FSA, UK Implementation of the EU Market Abuse Directive (Directive 2003/6/EC): A consultation document, June 2004, para 2.8, p 11 Back

326   Qq 1824-1825 Back

327   Qq 1757, 1770 Back

328   Qq 833, 1757 Back

329   Qq 833, 1759, 1765, 1769, 1779, 1820, 1829 Back

330   Q 1650 Back

331   Ev 218 Back

332   Ev,Ibid Back

333   Ev Ibid Back

334   Qq 173, 266 Back

335   Q 268. See also Qq 373-374 Back

336   Q 624 Back

337   Q 681 Back

338   Qq 754, 833, 1757, 1825  Back

339   Qq 794, 796, 1769 Back

340   Q 1766 Back

341   Q 1650 Back

342   Q 136 Back

343   Q 1620 Back

344   Q 577 Back

345   Q 795 Back

346   Q 577 Back

347   Q 796 Back

348   Qq 623, 675, 681, 345 Back

349   Qq 1615-1616 Back

350   Q 796 Back

351   Q 1668 Back

352   Qq 1668, 750 Back

353   Q 184 Back

354   Q 580 Back

355   Bank of England News Release, "Liquidity Support Facility for Northern Rock plc", 14 September 2007 Back

356   www.bbc.co.uk/blogs/thereporters/robertpreston/2007/10/16/index.html Back

357   Q 580 Back

358   Q 577 Back

359   Q 792 Back

360   Q 1527 Back

361   Q 623 Back

362   Q 623 Back

363   Qq 304, 464 Back

364   Q 529 Back

365   Q 1760 Back

366   Q 623 Back

367   Qq 1527, 345 Back

368   Q 678 Back

369   Qq 345, 792 Back

370   Qq 345, 792 Back

371   Q 1527 Back

372   Qq 14, 1618 Back

373   Q 26 Back

374   Q 677 Back

375   Q 57 Back

376   Q 677 Back

377   Qq 46, 57 Back

378   Q 1760 Back

379   HM Treasury press release, Statement by the Chancellor of the Exchequer on financial markets, 17 September 2007 Back

380   Q 1760 Back

381   Q 8 Back

382   Q 1617 Back

383   Qq 110, 112 Back

384   Q 113 Back

385   Q 1527 Back

386   Q 623 Back

387   Q 108 Back

388   Q 1620 Back

389   Q 1532 Back

390   Q 47 Back

391   Q 1649 Back

392   Q 1617 Back

393   Q 1622 Back

394   Q 108. See also Q 1646. Back

395   Q 1649 Back

396   Qq 55, 1763-1764 Back

397   Qq 1760-1762 Back

398   Q 750 Back

399   Q 1764 Back

400   Q 1763 Back

401   Q 854 Back