Treasury Contents

Examination of Witnesses (Questions 1-19)



  Q1 Chairman: Welcome to this hearing on UKFI. Can you introduce your colleagues, Sir David?

  Sir David Cooksey: Do you want me to say a few words to start with?

  Q2  Chairman: No. Just introduce your colleagues.

  Sir David Cooksey: On my right is John Kingman, who you will know well, chief executive of UKFI. He has previously spent 15 years with the Treasury. On his right is Keith Morgan, who is head of wholly owned investments, who started life as a management consultant but has had a long period at Abbey followed by Santander in retail banking until he joined UKFI two months ago. On my left is John Crompton, who started his working life in the Treasury and spent a number of years with Morgan Stanley, went back to the Treasury again and back to investment banking and joined UKFI at the beginning of the year.

  Q3  Chairman: I understand you will play no role in enforcing or monitoring the lending agreements between the Treasury, RBS and Lloyds, but you are involved on a day to day basis with these firms. Are they complaining to you that the terms are too onerous?

  Mr Kingman: No, they are not and we as shareholder are very clear that we expect the banks to meet the terms of any commitments they have signed with the Treasury. What our banks are saying to us is that there are attractive lending opportunities out there, both in residential lending and in SME lending, but as you say the task of ensuring that the commitments is one that the Treasury is undertaking.

  Q4  Chairman: Have you had any role in negotiating the lending agreements given the impact of the firms' potential balance sheets and future profitability?

  Mr Kingman: We had limited involvement partly because it was originally envisaged that UKFI might undertake the monitoring role. It is now well established and understood though that the lending agreements are conditional on there being attractive opportunities on commercial terms. In other words, the banks are not required to undertake high risk or uncommercial lending. We are clear that we expect the lending agreements to be met.

  Q5  Chairman: I asked the Chancellor yesterday in his statement on banking reform—perhaps you have seen it—and I was seeking that the lending agreements should be even more transparent so that we can monitor and track the lending in the country. The response we get from businesses is variable in terms of that information. The Chancellor did say that it is important to get to the bottom of all these lending problems. How can we make it more transparent so that people can get a handle on this?

  Mr Kingman: Firstly, the lending agreements themselves are published. They are available on the Treasury website. The key to this will be the annual assessment that the government will be publishing of the banks' performance in meeting the agreements. The first one of those will be next year.

  Q6  Chairman: Yesterday, Stephen Hester in a media conference call stated that RBS were "in dispute" with the government over a clause in the APS agreement over the potential to take control of assets. How firm are the agreements?

  Mr Kingman: We are not involved in that direct issue. The APS agreement is an agreement between RBS and the government. The role that we have played—and it has been quite extensive in the run up to the announcement yesterday—was in giving the government quite a lot of advice, both in the context of Lloyds and in the context of RBS, on what would be the impact of various scenarios in the government's investment on the value of the shares the government held. We are not in the direct line of fire on the clause by clause negotiations on the individual APS terms.

  Q7  Chairman: What did he mean by being in dispute?

  Mr Kingman: We have no involvement in the discussion that RBS is having with the government on that point, I am afraid. It is not a responsibility UKFI has.

  Q8  Chairman: Since you have over 80% of the bank you must know what the right hand is doing here.

  Mr Kingman: We are not interposing ourselves in a negotiation between RBS and the government.

  Q9  Chairman: Is it a case of hear no evil; see no evil, Sir David?

  Sir David Cooksey: Not at all. We have been advising the government all the way through on this. There is a separation of duties here.

  Q10  Chairman: On a simple level, if I own 84% of something and the chief executive of what I own says I am in dispute, I would want to know what was happening.

  Sir David Cooksey: This is very recent. We will certainly inquire and come back to you if that is helpful.

  Q11  Chairman: It does not need a question from the Treasury Committee to say that you are going to inquire. Surely we are not at that level yet, are we?

  Mr Kingman: There is an important point here which is that there are an awful lot of bodies involved in various aspects of the financial crisis and getting out of the financial crisis. We think we have to be clear about what we are there for and what we are not there for. The APS negotiations have been a huge thing over nine months or so and vital to the survival of the banks. We have played a role in giving advice as effectively the Treasury's investment manager on the structure of those contracts and so on but we do not have sight of the individual, contractual negotiations over the clauses of what is a very extensive agreement. That is something the Treasury is in discussion with RBS about and we do not have a role in that. It would not be proper for us to have one.

  Q12  Chairman: The case you put articulately but the logic of it defies me.

  Mr Kingman: How many cooks do you want?

  Q13  Chairman: You are the cook with 84%, for God's sake, the head chef.

  Mr Kingman: We are not the head chef. This is really important. The APS is an insurance policy created by the government which is vital to the survival of RBS. The government has also asked us to manage the government's investment in RBS. Those are two different things.

  Q14  Chairman: In the Chancellor's statement yesterday on the European issue, he said the new banks are being created but if no bank is allowed to go over 15% of the market then big players such as Barclays cannot bid. Some would argue that by excluding the big players the government will not get much of an auction going. How would you respond to that criticism?

  Mr Kingman: I do not think that is likely. Firstly, the banks have I think sensibly been given a four year period to make these disposals. That is a very important thing because it means we are not faced with the danger of having to make fire sales which could have left enormous losses for the taxpayer. We would expect to see healthy interest internationally for the kinds of assets that are going to be disposed of. We do not expect to be in a position where the banks will be selling these assets for less than their true value. I think the key to that is the timescale.

  Q15  Chairman: We get numerous complaints from individuals about the large disparity between the rates that banks charge for credit and the Bank rate. How many new players in the banking sector do you believe it will take for customers to see the benefit of competition?

  Mr Kingman: The announcements made yesterday are going to have a very significant impact because they are going to bring a number of players into the scene. The dynamic of the market is different from what it was before the crisis inevitably. There are fewer players. What I think the government is seeking to achieve is to have more players in the market and that is going to be the key to customers knowing they are getting fair terms.

  Q16  Chairman: Do you feel confident that all the firms in which you hold shares, whether fully owned or not, have made all the provisions they need for their problems? In other words, do you envisage there will be larger write downs in future, given the IMF strictures on this?

  Mr Kingman: This is a crucial issue to working through the crisis. We as shareholder have certainly pressed and encouraged our banks to be proactive in facing up to the losses that are on their books. We think it is hugely important from their point of view and from our point of view as shareholder that they do that; but the reality is that the losses they are exposed to are going to depend fundamentally on the future path of the economy. Therefore, I do not think anyone could say with any certainty that we are out of the woods yet. I would expect the process of working through the losses at all four banks to take some time yet.

  Q17  Chairman: Would you agree with David Miles, MPC member, when he came before the Committee and described the banks in general as on life support?

  Mr Kingman: I have not seen his exact remarks.

  Q18  Chairman: He made them here so you can take them as read from me.

  Mr Kingman: It is absolutely the case that both our investing banks and other British banks are currently still dependent on a variety of forms of public support. Without that support, they would be in a very bad condition. I have not seen his exact remarks but I think it is a fair characterisation, yes.

  Q19  Sir Peter Viggers: The Prime Minister has said, "We expect that when we have completed the restructuring of the banks the taxpayer will benefit financially from that, not lose money." Do you share that assumption?

  Mr Kingman: I do. We have not made any forecast of possible proceeds from sales of our investments. I think that would be literally impossible to do but as a matter of judgment, if you are asking my personal opinion, I would certainly expect us to see a positive return on our portfolio over time.

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