The run on the Rock

Draft Report (The run on the Rock), proposed by the Chairman, brought up and read.

Ordered, That the Chairman's draft Report be read a second time, paragraph by paragraph.

Ordered, That the Chairman's draft Report be considered in the following order: paragraphs 1 to 5, paragraphs 7 to 369, and paragraph 6.—(The Chairman.)

Paragraphs 1 to 5 read and agreed to.

Paragraph 7 read, amended and agreed to.

A paragraph—(Jim Cousins)—brought up, read the first and second time, and inserted (now paragraph 8).

Another paragraph—(Jim Cousins)—brought up, read the first and second time, and inserted (now paragraph 9).

Another paragraph—(Jim Cousins)—brought up, read the first and second time, and inserted (now paragraph 10).

Another paragraph—(Jim Cousins)—brought up, read the first and second time, and inserted (now paragraph 11).

Paragraphs 8 and 9 (now paragraphs 12 and 13) read, amended and agreed to.

Paragraph 10 (now paragraph 14) read and agreed to.

Paragraph 11 (now paragraph 15) read, amended and agreed to.

Paragraph 12 (now paragraph 16) read and agreed to.

Paragraph 13 (now paragraph 17) read, amended and agreed to.

Paragraph 14 (now paragraph 18) read and agreed to.

Paragraph 15 (now paragraph 19) read, amended and agreed to.

Paragraphs 16 to 21 (now paragraphs 20 to 25) read and agreed to.

Paragraphs 22 to 24 (now paragraphs 26 to 28) read, amended and agreed to.

Paragraph 25 (now paragraph 29) read and agreed to.

Paragraph 26 (now paragraph 30) read, amended and agreed to.

Paragraph 27 (now paragraph 31) read, as follows:

"It is right that members of the Board of Northern Rock have been replaced, though haphazardly, since the lender of last resort operation began. The high-risk, reckless business strategy of Northern Rock, with its reliance on wholesale funding and a failure to acquire sufficient insurance to cover that risk, meant that it was unable to cope with the liquidity pressures placed upon it by the freezing of international capital markets in August 2007. Given that the formulation of that strategy was a fundamental role of the Board of Northern Rock, overseen by some directors who had been there since its demutualisation, the failure of that strategy must also be attributed to the Board. The non-executive members of the Board, and in particular the Chairman of the Risk Committee and the senior non-executive director, failed in the case of Northern Rock to act as an effective restraining force on the strategy of the executive members."

Amendments made.

Another Amendment proposed, in line 8, to leave out from "Board" to the end of the paragraph.—(Jim Cousins.)

Question put, That the Amendment be made.

The Committee divided.

Other Amendments made.

Paragraph, as amended, agreed to.

Paragraphs 28 and 29 (now paragraphs 32 and 33) read and agreed to.

Paragraph 30 (now paragraph 34) read, amended and agreed to.

Paragraphs 31 and 32 (now paragraphs 35 and 36) read and agreed to.

Paragraph 33 (now paragraph 37) read, amended and agreed to.

Paragraph 34 (now paragraph 38) read and agreed to.

Paragraph 35 (now paragraph 39) read, amended and agreed to.

Paragraphs 36 and 37 (now paragraphs 40 and 41) read and agreed to.

Paragraphs 38 to 41 (now paragraphs 42 to 45) read, amended and agreed to.

Paragraphs 42 and 43 (now paragraphs 46 and 47) read and agreed to.

Paragraph 44 (now paragraph 48) read, amended and agreed to.

Paragraph 45 (now paragraph 49) read and agreed to.

Paragraph 46 (now paragraph 50) read, amended and agreed to.

Paragraph 47 (now paragraph 51) read and agreed to.

Paragraph 48 (now paragraph 52) read, amended and agreed to.

Paragraph 49 (now paragraph 53) read and agreed to.

Paragraphs 50 to 52 (now paragraphs 54 to 56) read, amended and agreed to.

Paragraph 53 (now paragraph 57) read and agreed to.

Paragraphs 54 and 55 (now paragraphs 58 and 59) read, amended and agreed to.

Paragraphs 56 to 58 (now paragraphs 60 to 62) read and agreed to.

Paragraph 59 (now paragraph 63) read, amended and agreed to.

Paragraph 60 (now paragraph 64) read and agreed to.

Paragraph 61 read, as follows:

"Professor Wood told us that 'the FSA does not seem to have carried out its job with the skill and diligence that one might have expected'. Professor Buiter argued that:

The FSA did not properly supervise Northern Rock. It failed to recognise the risk attached to Northern Rock's funding model. Stress testing was inadequate.

Sir Callum McCarthy told us that 'I think there are things which the FSA had responsibility for which, as we have both [Mr Sants and Sir Callum McCarthy] made clear, were not done well enough'. The Chancellor of the Exchequer also noted that 'the FSA have said, and it is right, that they do need to look at their procedures and how they regulate things'. We note that the Financial Services Authority have acknowledged that the time periods between comprehensive regulatory review of Northern Rock were 'inadequate'. We are also concerned about the lack of resources solely charged to the direct supervision of Northern Rock. The failure of Northern Rock, while a failure of its own Board, was also a failure of its regulator. As the Chancellor notes, the Financial Services Authority exercises a judgement as to which 'concerns' about financial institutions should be regarded as systemic and thus require action by the regulator. In the case of Northern Rock, the FSA appears to have been systematically blind to its duty as a regulator to ensure Northern Rock would not pose such a systemic risk, and this failure contributed significantly to the difficulties, and risks to the public purse, that have followed."

An Amendment made.

Another Amendment proposed, in line 10, after "'inadequate'", to insert:

"the FSA did not supervise Northern Rock properly. It did not allocate sufficient resources or time to monitoring a bank whose business model was so clearly an outlier; its procedures were inadequate to supervise a bank whose business grew so rapidly."—(Mr Michael Fallon.)

Question put, That the Amendment be made.

The Committee divided.

Other Amendments made.

Paragraph, as amended, divided and agreed to (now paragraphs 65 and 66).

Paragraphs 62 and 63 (now paragraphs 67 and 68) read and agreed to.

Paragraph 64 (now paragraph 69) read, amended and agreed to.

Paragraphs 65 to 68 (now paragraphs 70 to 73) read and agreed to.

Paragraph 69 (now paragraph 74) read, amended and agreed to.

Paragraphs 70 to 73 (now paragraphs 75 to 78) read and agreed to.

Paragraph 74 (now paragraph 79) read, amended and agreed to.

Paragraph 75 (now paragraph 80) read and agreed to.

Paragraph 76 (now paragraph 81) read, amended and agreed to.

Paragraphs 77 to 83 (now paragraphs 82 to 88) read and agreed to.

Paragraph 84 (now paragraph 89) read, amended and agreed to.

Paragraph 85 (now paragraph 90) read and agreed to.

Paragraphs 86 and 87 (now paragraphs 91 and 92) read, amended and agreed to.

Paragraphs 88 and 89 (now paragraphs 93 and 94) read and agreed to.

Paragraphs 90 and 91 (now paragraphs 95 and 96) read, amended and agreed to.

Paragraph 92 (now paragraph 97) read and agreed to.

Paragraphs 93 and 94 (now paragraphs 98 and 99) read, amended and agreed to.

Paragraph 95 (now paragraph 100) read and agreed to.

Paragraph 96 (now paragraph 101) read, amended and agreed to.

Paragraphs 97 to 105 (now paragraphs 102 to 110) read and agreed to.

Paragraphs 106 and 107 (now paragraphs 111 and 112) read, amended and agreed to.

Paragraphs 108 to 110 (now paragraphs 113 to 115) read and agreed to.

Paragraph 111 (now paragraph 116) read, amended and agreed to.

Paragraph 112 (now paragraph 117) read and agreed to.

Paragraph 113 (now paragraph 118) read and postponed.

Paragraph 114 (now paragraph 119) read, amended and agreed to.

Paragraphs 115 and 116 (now paragraphs 120 and 121) read and agreed to.

Paragraphs 117 and 118 (now paragraphs 122 and 123) read, amended and agreed to.

Paragraph 119 (now paragraph 124) read and agreed to.

Paragraph 120 (now paragraph 125) read, amended and agreed to.

Paragraphs 121 to 130 (now paragraphs 126 to 135) read and agreed to.

Paragraphs 131 and 132 (now paragraphs 136 and 137) read, amended and agreed to.

Paragraph 133 (now paragraph 138) read and agreed to.

Paragraph 134 (now paragraph 139) read, amended and agreed to.

Paragraph 135 (now paragraph 140) read and agreed to.

Paragraph 136 (now paragraph 141) read, amended and agreed to.

Another paragraph—(John Thurso)—brought up, read the first and second time, and inserted (now paragraph 142).

Paragraphs 137 to 139 (now paragraphs 143 to 145) read and agreed to.

Paragraph 140 (now paragraph 146) read, amended and agreed to.

Paragraph 141 (now paragraph 147) read and agreed to.

Paragraph 142 (now paragraph 148) read, amended and agreed to.

Paragraphs 143 to 155 (now paragraphs 149 to 161) read and agreed to.

Paragraph 156 (now paragraph 162) read, as follows:

"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, 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. 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."

Amendment proposed, in line 6, to leave out "A decision was taken on that day" and insert:

"In that context, it was unfortunate that the Chancellor of the Exchequer kept commitments abroad on Friday 14 September. A decision was taken on Sunday 16 September."—(Mr Philip Dunne.)

Question put, That the Amendment be made.

The Committee divided.

Paragraph agreed to.

Paragraphs 157 and 158 (now paragraphs 163 and 164) read and agreed to.

Paragraphs 159 and 160 (now paragraphs 165 and 166) read, amended and agreed to.

Paragraphs 161 to 163 (now paragraphs 167 to 169) read and agreed to.

Paragraph 164 (now paragraph 170) read and postponed.

Paragraph 165 (now paragraph 171) read and agreed to.

Paragraph 166 (now paragraph 172) read, amended and agreed to.

Paragraphs 167 to 169 (now paragraphs 173 to 175) read and agreed to.

Paragraph 170 (now paragraph 176) read, amended and agreed to.

Paragraphs 171 to 175 (now paragraphs 177 to 181) read and agreed to.

Paragraphs 176 and 177 (now paragraphs 182 and 183) read, amended and agreed to.

Paragraphs 178 to 185 (now paragraphs 184 to 191) read and agreed to.

Paragraph 186 read, amended, divided and agreed to (now paragraphs 192 and 193).

Paragraphs 187 to 193 (now paragraphs 194 to 200) read and agreed to.

Paragraph 194 (now paragraph 201) read and postponed.

Paragraph 195 and 196 (now paragraphs 202 and 203) read and agreed to.

Another paragraph—(Peter Viggers)—brought up, read the first and second time, amended and inserted (now paragraph 204).

Paragraphs 197 to 207 (now paragraphs 205 to 215) read and agreed to.

Another paragraph—(Mr Graham Brady) brought up, read the first and second time, and inserted (now paragraph 216).

Paragraphs 208 to 223 (now paragraphs 217 to 232) read and agreed to.

Postponed paragraph 113 (now paragraph 118) again read, amended and agreed to.

Postponed paragraph 164 (now paragraph 170) again read, amended and agreed to.

Paragraph 224 (now paragraph 233) read, amended and agreed to.

Paragraphs 225 to 241 (now paragraphs 234 to 250) read and agreed to.

Paragraphs 242 and 243 (now paragraphs 251 and 252) read, amended and agreed to.

Paragraphs 244 to 246 (now paragraphs 253 to 255) read and agreed to.

Paragraph 247 (now paragraph 256) read, amended and agreed to.

Paragraphs 248 to 253 (now paragraphs 257 to 262) read and agreed to.

Paragraph 254 (now paragraph 263) read, amended and agreed to.

Paragraphs 255 and 256 (now paragraphs 264 and 265) read and agreed to.

Paragraph 257 (now paragraph 266) read, amended and agreed to.

Paragraph 258 (now paragraph 267) read and agreed to.

Paragraph 259 (now paragraph 268) read, amended and agreed to.

Paragraphs 260 to 264 (now paragraphs 269 to 273) read and agreed to.

Paragraph 265 (now paragraph 274) read, amended and agreed to.

Paragraph 266 (now paragraph 275) read and agreed to.

Paragraphs 267 and 268 (now paragraphs 276 and 277) read, amended and agreed to.

Paragraphs 269 and 270 (now paragraphs 278 and 279) read and agreed to.

Paragraph 271 (now paragraph 280) read, amended and agreed to.

Paragraphs 272 to 274 (now paragraphs 281 to 283) read and agreed to.

Paragraph 275 (now paragraph 284) read, amended and agreed to.

Paragraphs 276 to 279 (now paragraphs 285 to 288) read and agreed to.

Paragraph 280 (now paragraph 289) read, amended and agreed to.

Paragraphs 281 to 284 (now paragraphs 290 to 293) read and agreed to.

Paragraph 285 (now paragraph 294) read, amended and agreed to.

Paragraphs 286 to 289 (now paragraphs 295 to 298) read and agreed to.

Paragraph 290 (now paragraph 299) read, amended and agreed to.

Paragraphs 291 to 301 (now paragraphs 300 to 310) read and agreed to.

Paragraph 302 (now paragraph 311) read, as follows:

"The Bank of England is therefore a potential recipient of the Depositor Protection Fund. On a purely technical level, the Bank of England is used to dealing with such pools of assets as would be built up by the Fund. Moreover the Bank of England's role in financial stability could be strengthened by this move, countering the fear of the BBA that downplaying the role of the Bank of England would not be regarded well by the international community."

Amendment proposed, in line 1, to leave out from "of" to "of" in line 4 and insert:

"responsibility for the additional powers in relation to banks in distress that we proposed in chapter 5 and for the Deposit Protection Fund that we proposed in chapter 6. In relation to the powers under chapter 5, allocation of these responsibilities to the Bank of England would complement the Bank's existing oversight of liquidity and its money market operations, and would strengthen the involvement of the Bank with the liquidity of individual banks. In relation to the powers under chapter 6, attribution to the Bank of England would make sense given that the Bank of England has experience in handling pools of assets of the kind that would be built up by the Deposit Protection Fund. Overall, the new powers would dovetail with the existing responsibilities of the Bank of England in relation to financial stability, while at the same time ensuring the 'creative tension' that we earlier said that we wished to see in the regulatory system. Such a change would also respond to the concern".—(Mr Michael Fallon.)

Question proposed, That the Amendment be made.

Proposed Amendment amended, in line 8, after "Fund", by inserting "such as the Cash Ratio Deposit Scheme".—(Mr Philip Dunne.)

Question put, That the proposed Amendment, as amended, be made.

The Committee divided.

Paragraph, as amended, agreed to.

Paragraphs 303 to 308 (now paragraphs 312 to 317) read, amended and agreed to.

Paragraph 309 (now paragraph 318) read and agreed to.

Paragraphs 310 to 314 (now paragraphs 319 to 323) read, amended and agreed to.

Paragraph 315 (now paragraph 324) read and agreed to.

Paragraphs 316 to 319 (now paragraphs 325 to 328) read, amended and agreed to.

Another paragraph—(Mr Michael Fallon)—brought up and read, as follows:

"We recommend that formal advice given to the Chancellor of the Exchequer by the other Tripartite authorities in any future circumstances where financial stability is threatened be published as soon as reasonable after the immediate threat has passed, excluding any commercially sensitive information."

Question put, That the paragraph be read a second time.

The Committee divided.

Paragraph inserted (now paragraph 329).

Paragraphs 320 to 349 (now paragraphs 330 to 359) read and agreed to.

Paragraph 350 (now paragraph 360) read, amended and agreed to.

Paragraph 351 (now paragraph 361) read and agreed to.

Paragraph 352 (now paragraph 362) read, amended and agreed to.

Paragraphs 353 and 354 (now paragraphs 363 and 364) read and agreed to.

Paragraph 355 (now paragraph 365) read, amended and agreed to.

Paragraphs 356 to 360 (now paragraphs 366 to 370) read and agreed to.

Another paragraph—(Jim Cousins)—brought up, read the first and second time, amended and inserted (now paragraph 371).

Paragraph 361 (now paragraph 372) read and agreed to.

Paragraph 362 (now paragraph 373) read, amended and agreed to.

Paragraphs 363 and 364 (now paragraphs 374 and 375) read and agreed to.

Postponed paragraph 194 (now paragraph 201) again read, amended and agreed to.

Paragraphs 365 to 369 (now paragraphs 376 to 380) read and agreed to.

Paragraph 6 read, amended and agreed to.

Annexes agreed to.

Summary amended and agreed to.

Resolved, That the Report, as amended, be the Fifth Report of the Committee to the House.

Ordered, That the Chairman make the Report to the House.

Written evidence was ordered to be reported to the House for printing with the Report.

Ordered, That embargoed copies of the Report be made available, in accordance with the provisions of Standing Order No. 134.

[Adjourned till Tuesday 5 February at 9.30 am.