Sants: Run on Rock could have been prevented
Hector Sants has something to get off his chest, which has been bugging him for years.
The outgoing chief executive of the Financial Services Authority believes the run on Northern Rock, which in a sense branded the UK as the first major economy to be seriously damaged by the banking crisis, could have been avoided, if his own advice had been followed.
In an interview with me, Sants, who is leaving the City watchdog at the end of June after five years as chief executive and eight years in total, made a number of other striking disclosures:
- He believes the personal responsibilities of the governor of the Bank of England will become excessive when the Bank acquires formal responsibility to regulate and supervise banks and big financial institutions next year;
- He says that if the eurozone goes for a banking union, with a single supervisor of eurozone banks and a common scheme for protecting deposits, the current system whereby regulations for UK banks are set by the EU will become "unworkable" for Britain - because the British government would no longer have any influence on the formulation of the rules that govern our banks;
- He says it would probably have been better to fully nationalise Royal Bank of Scotland and Lloyds in the autumn of 2008 rather than keeping them as semi-independent businesses with shares listed on the stock market;
- He implies that UK banks may not have quite enough capital to deal with all potential shocks that the eurozone crisis may throw at them.
So why does Sants think the run on the Rock could and should have been prevented? Well he said that just before the Rock received its emergency bailout from the Bank of England - which as it happens I disclosed on the evening of 13 September 2007 - and before the Rock's depositors queued around the block to remove their cash from the bank, he recommended that Lloyds TSB should be granted the loan it was requesting from the Bank of England to facilitate a takeover of the Rock.
Sants said: "I think things would have been different if the government and Bank [of England] had taken my recommendation that they should provide liquidity support to Lloyds to purchase Northern Rock. I think that would have made a difference, it would have avoided the queues and it would have changed the general climate in relation to the old building society sector that had moved into the banking sector. So at that early stage if we had avoided the Northern Rock problem, which we could have done through that action, then I think the tone and people's view of the UK banking sector would have been different."
On the weekend of 8-9 September, there was a conference call of the so-called Tripartite of the Chancellor of the Exchequer, who was Alastair Darling at the time, the then chairman of the FSA, Sir Callum McCarthy, and Sir Mervyn King, who is still governor of the Bank of England. Mr Sants, who did not normally participate in these meetings, was also in the telephonic meeting.
Sants recommended that Lloyds should be given the guarantee it wanted that in the event that lenders to the Rock withdrew their funds in the succeeding months - which was a serious risk in the global credit crunch of the time - Lloyds would be able to fill the gap with loans from the Bank of England. But Sir Mervyn King said the Bank of England would not provide the money. And, I am told, the chancellor said nothing.
The rest is inglorious British banking history: Lloyds dropped the takeover; and Northern Rock was set on its path to nationalisation just a few months later.
As it happens, in November 2007, I asked Sir Mervyn why he opposed giving the loan to Lloyds (at the time I did not know he was going against the FSA's advice). He said Lloyds was asking for a potential loan of up to £30bn for a commercial deal and that was not something a central bank could provide - and he also advised the chancellor not to provide what would have been a massive overdraft facility for Lloyds.
Hector Sants believes Sir Mervyn was wrong to be so dogmatic about what central banks can and cannot do. Which may also help to explain another of his striking views, namely that when the Bank of England receives its additional powers to regulate and supervise banks and large financial institutions, the personal responsibilities of the governor of the Bank of England will be excessive.
Sants said: "We could be concerned that the operational task given to the governor as an individual, of course that will be a new governor by the time the reforms come into place, is just too great... I'm comfortable with the powers given to the institution, but I would have a greater spread with how those powers are divided up."
This will be music to the ears of MPs on the Treasury Select Committee, under its chairman Andrew Tyrie, who have also become concerned at the growing power of the governor.
As to how a banking union in the eurozone would affect the UK, Sants said: "It seems difficult to imagine that the current UK approach can work in the scenario [of a banking union]... We support a single European rulebook... But we supervise locally... Of course that rulebook is created by one country one vote, so if you move to an environment where the majority of the countries were inside the eurozone and so have a different agenda in respect to the rulebook, that would seem to become an unworkable model.
"[We would be] dependent on a rulebook that effectively we would have lost all control over. At the moment we only have partial control over that rulebook, but potentially we would have lost all control over it. So I think we are at a tipping point whereby the current approach to eurozone regulation for a non-eurozone country could well be unworkable."
I also asked Sants whether in retrospect the government rescued HBOS, Lloyds and Royal Bank of Scotland in the right way in the autumn of 2008, when it took huge stakes in Lloyds (which bought HBOS) and RBS, but left them as stock market businesses. Would complete formal nationalisation, 100% ownership by the state, have been better? This is what he said:
"Broadly speaking we did put in the right amount of capital relative to the problems that were likely to be faced domestically… I think the severity of the euro crisis, because it's gone on a lot longer than people expected, has been greater, so in terms of ensuring the banks were properly capitalised against the euro crisis you could argue we could have put in a little bit more... But we got it about right relative to the then problem."
Which rather implies that British banks could need a bit more capital, to absorb losses, given the severity of the eurozone crisis.
But he added: "I do think there's an argument that says it would have been easier to restructure… if the banks did not have minority shareholdings in the private sector i.e. if the government controlled them all, and then there was an argument that says they could have restructured them more radically... But the counterbalance is that the private sector is better in managing that process so it's a finely balanced argument. But I tend to the view that we would have been better off with more direct control."