TUESDAY 11 DECEMBER 2007

SIR CALLUM MCCARTHY, MR HECTOR SANTS AND MS LORETTA MINGHELLA

  Q1440  John Thurso: Can I just have a go at your crystal ball? What failures do you see ahead next year that you are going to be raising money for?

  Ms Minghella: We are in the process of preparing our forecasts for next year at present—

  Q1441  John Thurso: But you are forecasting that there will be failures and you will raise money?

  Ms Minghella: Yes, that is right, based on our past experience and on the information available to us at the time of the levy decision. If a failure were to occur that was not in our forecast we would levy for it at the time, and the industry would be obliged to pay our levy invoices within 30 days.

  John Thurso: That is such a wonderful minefield of information that you have given us there that I do not think the Chairman would let me prosecute all of the possibilities -

  Chairman: Try your best!

  Q1442  John Thurso: One begins by saying was Northern Rock in your forecast?

  Ms Minghella: No, it was not.

  Q1443  John Thurso: So what confidence can I have in the forecasts you have got?

  Ms Minghella: It is not bust; it has not gone bust; and we only levy for firms that we believe are likely to come our way for pay-out.

  Q1444  John Thurso: Do you think anything will go bust?

  Ms Minghella: Based on our past experience we can anticipate a number of failures. We have since we took our power six years ago declared 1,800 firms in default and, based on that pattern, we can foresee—

  Q1445  John Thurso: But none of those are major deposit holding banks?

  Ms Minghella: Absolutely not, no. In the deposit taking area we have only had 29 credit union failures, and that is it, and they are small.

  Q1446  John Thurso: In your forecasts do you forecast that any major deposit taking institutions are up to fail?

  Ms Minghella: Not at present, no.

  Q1447  John Thurso: So in fact, if you come down to the major banks and the principal secondary banking institutions, you are not forecasting any failures and therefore you are not going to be raising any funds, in fact?

  Ms Minghella: Not in advance, that is right, so we levy according to need, and should the need arise mid-year we would levy at that point.

  Q1448  John Thurso: Thank you for that. One of the problems with the protection system or the reasons why it has to exist is that if a bank is put into administration the depositors become creditors in line with ordinary law and, as a result, they are unsecured and therefore take their chances following what the receiver or administrator will do, whereas that is a politically unacceptable situation and therefore governments step in and have schemes. Is there any merit in considering changing the legal status of depositors such that they are in a secured creditor position so that it changes the balance of moral hazard?

  Sir Callum McCarthy: Clearly the Government could, if it wished, change insolvency law. You would have to be very careful in approaching those changes because it would also change the relative attractiveness of advancing money in other ways for the funding of banks, and before making a particular change it is very important to consider the overall effect on the banking system.

  Q1449  John Thurso: The fundamental point here is that the banking system in virtually every country depends on the fact that governments will not allow banks to fail and will therefore have some form of scheme or rescue always in place, so what the banking industry are asking us to do is to publicly underwrite that. If you change the structure of the law, you put that cost and that responsibility back on to the banking system earlier in the process. Does that not have some merit?

  Sir Callum McCarthy: I would point out that it is not the case that all banks in all circumstances have been saved. I can understand the merit of the argument but I also think it has to be weighed carefully with the continuing need to make banks attractive as institutions to either invest in or to lend to.

  Q1450  John Thurso: The Governor of the Bank of England admitted that our system for dealing with insolvency of banks and depositor insurance is markedly inferior to all other countries. What changes could we make in particular to the release of depositor funds in the event of a bank failure that we could learn from other countries.

  Sir Callum McCarthy: I would not agree with that statement in comparison with "all" other countries; I am not sure if the Governor intended it as such.

  Q1451  John Thurso: I think he was selecting his countries.

  Sir Callum McCarthy: I think there are certainly things we can learn from the US experience where they have the ability to deal with a failure rapidly and in a way which enables them to take powers to deal with a failing bank.

  Q1452  John Thurso: So you would share John Bovenzi's view that, had the UK had a system rather like the US model of depositor protection, the Northern Rock crisis could have been avoided in the UK?

  Sir Callum McCarthy: It would have undoubtedly been of real help in preventing the retail run.

  Q1453  John Thurso: The final question, if I may, and it really goes back to what I was touching on, is this. If we had had an effective depositor protection scheme and a more suitable insolvency regime in place at the time, would the Tripartite Authorities simply have allowed Northern Rock to fail? And maybe I should not ask the question "would" they have, but "could" they have? Would it have been easier?

  Sir Callum McCarthy: I honestly do not know, I am sorry. I understand the question but I am not sure if I can deal with the hypothetical circumstances. The issues that would have been involved would have been serious and I do not know the answer, is the only truthful answer I can give.

  Q1454  John Thurso: I am probably asking you to speculate, then, but do you think there are any banks that are simply too big to rescue?

  Sir Callum McCarthy: No. If you look at those instances where there have been very big banking failures, the Swedish experience, for example, people have been rescued on a very large scale. Going back to the other question, just thinking about it in terms of the US experience, I do not think the answer is self-evident, that if you had a deposit insurance and the insolvency regime you have in America it necessarily makes it easier to take a decision not to save institutions. I think it is still a difficult decision.

  Mr Sants: Indeed you could argue it might have been the converse because, taking your earlier point that the Tripartite would have been more confident that there would not be a run on the Bank then the cost of saving it would probably have been estimated to be less, but it is obviously a finely balanced call.

  Q1455  Chairman: What constraints does the Deposit Guarantee Schemes Directive, Sir Callum, impose on the design and operation of the UK scheme? For example, would a US style system be permissible here if so desired?

  Sir Callum McCarthy: My understanding is that it represents minimum levels, and does not constrain us.

  Q1456  Chairman: Are any changes afoot on the European Commission's Deposit Guarantee Scheme Directive that you are aware of?

  Sir Callum McCarthy: Not that I am aware of, no.

  Q1457  Chairman: How should the UK deposit insurance system deal with the issues of home versus host regulation?

  Ms Minghella: The way it works now is that if a UK deposit institution were to fail it would be for the UK as a home state to look after the depositors, not only the depositors in the UK but the depositors of any EEA branch, and if a EU bank from overseas passports into the UK, it is for the home state of that EU bank to look after the depositors and for us only to become involved if the bank has topped up into the UK scheme, which a number of banks have done. That is basically the way it works under the Directive.

  Q1458  Chairman: Sir Callum, the Chancellor assured this Committee that the 100% guarantee given by the Government to the depositors of Northern Rock did not extend to any other institution; rather "each case will be assessed on its merits". How credible is that assurance?

  Sir Callum McCarthy: I see no reason to doubt it, Chairman. It was a statement made to you seriously by the Chancellor.

  Q1459  Chairman: So it is 100% credible?

  Sir Callum McCarthy: I absolutely believe that the Chancellor meant what he said.