» Tuesday, September 18, 2007

Northern Rock

The PMS stated that the Bank of England had this morning announced measures to inject an extra £4.4 billion of liquidity into the market. Financial authorities had continued to monitor the situation and remained in contact with Northern Rock. The Tri-Partite Committee of the Treasury, the Bank of England and the Financial Services Authority (FSA) were meeting again that morning with the Chancellor, for an updated assessment of the situation. After the update to Cabinet this morning the Prime Minister and the Chancellor both reiterated two key points; firstly that the volatility seen in financial markets, which had been the origin of the events of the past few days relating to Northern Rock, was an international phenomenon originating in the United States and it was effecting all of the major economies in different ways; secondly that the question had been for the UK, how well placed was Britain to withstand shocks of this kind, and that because of the underlying strength of the economy and the framework for monetary, fiscal and regulatory policy put in place, the country was well placed to withstand such shocks just as it had withstood similar shocks over the past decade.

Asked how the Bank of England had made the £4.4 billion available, the PMS replied that it was by the normal procedures for issuing liquidity into the money market. The PMS advised to check with them on the technical details. The PMS added that it was part of the Bank of England’s ongoing open market operations and there had been an announcement that morning which the PMS offered to read out.

Asked whether this was a change of policy from what the Bank of England’s Governor had raised in his memo last week, the PMS replied that the Governor had explained in his statement that in exceptional circumstances, where there was short term productivity effecting the functioning of the financial markets, temporary responses such as those were justified, but that it was best to go to the Bank of England as he was not a spokesman for them.

Asked whether the Government thought Alistair Darling’s speech had come too late the PMS replied that the action that was taken by the Chancellor yesterday afternoon was a very decisive step that made it absolutely clear to everybody that there should be no ambiguity that the Government stood fully behind the deposits in Northern Rock and that nobody should be in any doubt about what that meant. The PMS continued by saying it was a matter for individuals as to what they chose to do with their own money and it was not for the Government to comment on that; it was clear that the Government stood behind the deposits of Northern Rock as the Chancellor said yesterday.

Put again that the statement came late the PMS said that obviously this was a fast moving situation; there were continuous discussions between the FSA, the Treasury and the Bank of England on what the appropriate action should be, that a decision was taken during the course of yesterday afternoon, announced immediately, and had clearly had an impact.

Asked whether the Prime Minister still had confidence in the Governor of the Bank of England, the PMS said the Prime Minister had full confidence in the Governor and had worked closely with him in his former role as Chancellor. The PMS added that the Prime Minister thought the Governor had done a very good job and was a highly regarded figure around the world.

Put that the Prime Minister may be concerned that the public was losing confidence in Government promises, the PMS reiterated that decisive action was taken yesterday. It was up to the public to make their own decisions over what they wanted to do with their own money, but clearly the queues outside Northern Rock branches appeared to be less than what had been seen previously.

Asked what had made the Government change it’s mind on the guarantee of deposits, the PMS replied that it was a fast moving situation. The Chancellor, in consultation with the head of the FSA and the Governor of the Bank of England decided that further action was necessary during the course of yesterday afternoon and then took that action.

Asked what prompted the decision, the PMS said that he did not want to ascribe it to any precise causes, but clearly the Chancellor felt it was necessary to make absolutely clear to people that there should be no ambiguity about the strength of the Government’s commitment to Northern Rock. Put that it was the Chancellor’s decision in consultation with the other bodies, the PMS confirmed that it had been the Chancellor’s decision.

Asked if there were any plans by the Government to look at or review in any way, how deposits are insured in the future, the PMS replied that the Chief Executive of the FSA had been speaking about the subject that morning. The Treasury, the FSA and the Bank of England would want to look at all aspects of the protection system, including the compensation scheme and the range of tools available for dealing with this sort of situation.

In reply to the suggestion that the Government’s attitude smacked of complacency, given that the public had been queuing up outside branches of Northern Rock, the PMS replied that it was not complacent at all. The PMS added that the Government was very vigilant to the risks. There was always instability in financial markets and this had been seen over the past decade. In the face of tripling oil prices, the dotcom boom, Asian and Russian crises in the late 1990’s that tipped other countries into recession, the same had not occurred in Britain. The country had faced comparable shocks and yet still achieved 60 consecutive quarters of growth. The PMS said there were no grounds for complacency and the Government would always be vigilant to any risks.

Asked if the Tripartite system had worked, the PMS replied that there were particular issues relating to one institution and action was taken in order to deal with that. In general, the fundamentals in the economy remained sound.

Asked where the money was coming from to pay for the adjustments and any provisions, the PMS said it would be best to talk to the Treasury for the details. The first thing to emphasise was that Northern Rock was a solvent institution, the company did have collateral of it’s own and also a large asset book in the form of it’s mortgages. There were assets in Northern Rock and that was why the Government was able to make the guarantee it had. Furthermore, an assessment had to be made on the likelihood of the resources being pooled in the first place. The PMS added that in terms of the specifics, it was best to talk to the Treasury.

Asked repeatedly whether compensation would extend to any other bank in similar circumstances and was there any anxiety on the Government’s part about having to do the same in any repeat scenario, the PMS replied that there were clearly particular circumstances relating to Northern Rock and that’s why the decision had been taken. The Chancellor had made clear that similar arrangements would be put in place if another institution found itself in similar circumstances. The PMS said there had been no approaches from any other financial institution to the Bank of England to make use of their facilities.

Asked if the Governor of the Bank of England’s reappointment was a formality, the PMS said it was a fixed term appointment and when that expired a decision would be taken about what happened subsequently. The PMS reiterated that the Prime Minister thought the Governor had done a very good job and was a very highly regarded figure around the world. Asked when the Governor’s term of office was up, the PMS replied that he thought it was in 2008, but the Treasury could give a definitive date.

Asked what advice the Prime Minister would give to someone considering getting on the property ladder for the first time, the PMS replied that the Prime Minister did not give out financial advice.

Asked where the tripartite committee would be meeting that morning and what level of representation would be present from the FSA and the Bank of England, the PMS said the meeting would take place at the Treasury and the Deputy Governor would be attending for the Bank of England.

Asked whether the Prime Minister thought the management of Northern Rock were entirely free of any blame for the institution’s problems, the PMS replied that it would not be appropriate for the Prime Minister to comment on the management of individual companies and such matters were for the board of directors and the shareholders of that institution, as well as the regulatory authorities. Put that Northern Rock was now a company underwritten by the State, the PMS reiterated that it would be inappropriate to comment on the management of any individual company.

Asked whether the FSA’s compensation scheme was suspended, the PMS said that in the case of Northern Rock it was not necessary as there would never be a situation where members of the public would have to apply for compensation, as their deposits were guaranteed separately by the Bank of England. At the moment there was only one institution that was in such a situation and that was Northern Rock.

Asked if there had been any consultation between the Prime Minister or the Chancellor and the Chief Executive of Northern Rock, the PMS replied that there had been discussions involving the Treasury, the Bank of England, the FSA and the company, but they had not involved the Prime Minister.

Briefing took place at 11:00 | Search for related news

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