Treasury Contents

Examination of Witnesses (Questions 20-39)



  Q20  Sir Peter Viggers: What are the greatest impediments and hazards?

  Mr Kingman: One could imagine a number of impediments and hazards. One would be for example if we were to be under pressure to make sales artificially quickly. The position is that we are not under any such pressure but were we to be under such pressure I think there would be grave dangers of poor value for money transactions. The other huge danger which is obviously not in our control is the future path of the economy. That will be the fundamental determinant of the performance of shares over time and the value we are able to realise in disposing of them.

  Q21  Sir Peter Viggers: Your mandate says that UKFI will act as the principal liaison point with each listed investee company but only with respect to HM Treasury's role as shareholder in these institutions. That is quite a specific and finite mandate. What work is the Treasury undertaking, other than the work you do, and what information do you receive as to what is discussed?

  Mr Kingman: The Treasury has other responsibilities for financial stability for example. As a member of the tripartite, the Treasury gets a great deal of information from the FSA as regulator, from the Bank of England, which we would not see as shareholder. The other thing is that there are other parts of government—for example the Department of Business has a role in assisting the Treasury on monitoring the lending conditions. There are certainly other strands of government which have other interests and dealings with the banks on all sorts of issues.

  Q22  Mr Fallon: John Kingman, you said to the Chairman that you expect the lending conditions to be met. What will you do if they are not?

  Mr Kingman: Strictly speaking, that will not be our responsibility. They are legal agreements between the Treasury and them but for example, to give you a very concrete and practical example, we have agreed with the board of RBS that meeting the lending conditions should be one of the conditions of Stephen Hester's bonus payment. We think that it is entirely appropriate to incentivise him to do that.

  Q23  Mr Fallon: Is that the only sanction?

  Mr Kingman: No. They are legal agreements.

  Q24  Mr Fallon: I know they are legal agreements. I want to know what happens if they are not met.

  Mr Kingman: They are legal agreements and what that means is that banks are required to meet them.

  Q25  Mr Fallon: I know that. I know they are required to meet them. I want to know what happens if they do not meet them.

  Mr Kingman: They have to meet them.

  Q26  Mr Fallon: This mandarin speak is not getting us anywhere. If they do not meet them, apart from Stephen Hester losing his bonus, what other sanctions are at your disposal or the Treasury's disposal?

  Mr Kingman: I find this extremely hard to imagine in practice but theoretically the Treasury could simply sue the banks. I think that is extraordinarily unlikely because the banks are clear they are going to meet the commitments. If we were looking at a situation where there was a serious danger of them failing to meet the lending commitments, we would get very heavy with them as shareholder because we would see that as creating major instability in the business that we are invested in and that would be a very bad thing.

  Q27  Mr Fallon: I do not understand what getting heavy as a shareholder means, other than voting against Stephen Hester's bonus.

  Mr Kingman: It really has not been our experience that the banks are willing to ignore the views of us as shareholder on all sorts of things. I would expect the banks to take very, very seriously any risk that they were going to fail to meet the lending conditions. That has been absolutely our experience and the government's experience so far.

  Q28  Mr Fallon: Sir David Cooksey, eventually you are going to sell off Northern Rock and Bradford and Bingley. How are you going to get best value for the taxpayer for those two banks and promote competition at the same time in the banking sector?

  Sir David Cooksey: First of all, we need to separate the good bank at Northern Rock from the bad bank. In terms of the bad bank and Bradford and Bingley, this will be a run off of the mortgage portfolios over time or the sale of those portfolios if that can be done at the right price. What we need to do there is to make sure that we get the best possible yield from those portfolios. As far as the good bank at Northern Rock is concerned, we are clearly mandated as a result of yesterday's announcement to make sure that we broaden the ownership in the banking sector.

  Q29  Mr Fallon: You would not necessarily then get best value for it if you are trying to find a purchaser to broaden choice in the high street.

  Sir David Cooksey: That is not necessarily the case if for instance we encourage a foreign bank to come in and buy the Northern Rock good bank.

  Mr Morgan: The experience of Northern Rock just over a year ago when there were discussions around its future showed there were quite a lot of innovative proposals in terms of taking ownership of Northern Rock. I think it is true to say that there are people in the market place who are not big banks who would find value in it. There is value in the 76 branches, value in the retail deposits it holds and value in the mortgage origination platform. My expectation is that we would have a fair number of people interested, both people who are smaller players or interested in establishing themselves in the country but also international players as well.

  Q30  Mr Fallon: I want to be clear who will not be allowed to bid. Will none of the existing UK banks be allowed to bid?

  Sir David Cooksey: We have had no direct instructions from the Treasury as yet, but one would anticipate that the larger UK existing banks would not be allowed to bid.

  Q31  Mr Fallon: Barclays or HSBC would not be allowed to?

  Sir David Cooksey: That is the implication of the Chancellor's statement yesterday.

  Q32  Mr Fallon: What is your view?

  Sir David Cooksey: My view is that in the interests of the customer and in the interests of the market as a whole broadening the field would help very considerably.

  Mr Kingman: We are not at the moment in the process of contemplating the sale of this bank. The key focus for us at the moment is on achieving the split. There is a huge amount of work under way on that and it is complicated business. Getting it right is incredibly important. As and when we have got that through—and we hope that will be done by the end of the year—then we will start to address the question at what point is the right point to start to consider selling that business. There is obviously a very tricky value question there which we will advise the government on. We will also be wanting to discuss with the government what constraints it will want to impose on a sale. At the moment I do not think we have the kind of depth of understanding of potential buyer interest, because we are not focused on the sale at this point, to be able to give you a clear answer that says, "Yes, Santander would be allowed in" or, "Santander would not be allowed in." Nobody in government has addressed that question yet because the business at hand is really about getting the split done.

  Chairman: We hope to have you back in January, Mr Kingman, in order to explain that further to us.

  Q33  Mr Tyrie: Just to be clear, in response to an earlier question from Michael Fallon, there will be no restrictions on overseas bidders and that would include sovereign wealth funds?

  Mr Kingman: I have no idea whether a sovereign wealth fund would—

  Q34  Mr Tyrie: I did not ask that. I was asking whether—

  Mr Kingman: I envisage no restrictions on the nationality of ownership of any of our assets.

  Q35  Mr Tyrie: Will you be making an assessment of the long run solvency of the bidders?

  Mr Kingman: An assessment would have to be made and that would be made by the FSA as regulator because the buyer would be taking on a regulated, British bank.

  Q36  Mr Tyrie: You are creating banks here none of which can have more than 15% of the market. Would you agree that this will mean these banks will be small enough to fail?

  Mr Kingman: That is a completely regulatory question on which I do not think it would be possible for us to comment. We are not a regulator.

  Q37  Mr Tyrie: Who is going to examine that question?

  Mr Kingman: The FSA as regulator.

  Q38  Mr Tyrie: You are going to consult with them?

  Mr Kingman: Whether or not any British bank is or is not allowed to fail is in the end a judgment for the tripartite, advised by the FSA. The shareholder role is really not the issue.

  Q39  Nick Ainger: In reply to our report on the banking crisis, part of the UKFI response stated in relation to the bonus culture, "UKFI has worked with both RBS and LBG to implement what are perhaps the most far reaching reforms to remuneration structures of any large bank in the world. Both banks have committed to fundamental reviews of their approach to future remuneration and UKFI will continue to work with them on this." What is RBS's bonus pot this year?

  Mr Kingman: No decision has been made on any bonuses at RBS for 2009. What has been decided, as was announced yesterday, is that as for 2008 there will be no discretionary cash bonuses paid for 2009 at RBS for anything other than staff paid less than £39,000 a year. We will as shareholder need to discuss with RBS what their bonus arrangements should be for 2009 in terms of quantum, in terms of amount, and I think that as with all these things that is going to be a hugely important decision for us. It is one that we will approach from two perspectives. One is we are here working for the public and the public are understandably angry, bewildered, I would say, about the payments of bonuses in the banks in which we are invested. On the other hand, we as shareholder have a huge interest in holding these banks together. That is something that every household in Britain has an interest in. If I may say so, I think the TSC's report brought out that dilemma very clearly. We have to walk this tightrope by which we, on the one hand, reform the cultures—and I believe we really have made a huge difference to the cultures and remuneration practices in these banks—but, on the other, we cannot afford to be in a position where the banks lose so many people that we start to lose serious value. The other point that I would make here is: this is also playing into investor perceptions of the banks in which the governments are invested and we are seeing that. There is a dilemma for government there too because, on the one hand, government wants to see pay structures reformed. On the other hand, we need to get the share prices up in order to reduce the enormous losses that the taxpayer has suffered in investing in these banks for reasons of financial stability. That is a terrible dilemma, but that is the heart of what we have to do on these pay issues.

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Prepared 27 November 2009