Taxpayer support for UK banks: FAQs

In 2007, financial markets entered a sustained period of instability, causing difficulties for banks across the world, precipitating a global credit crisis, a widespread economic downturn and, by 2010, concern over certain Eurozone governments’ ability to service their debt obligations. The Treasury, like many other finance ministries around the world, took actions to:

• protect depositors in banks suffering insolvency or a severe decline in market confidence;
• maintain liquidity to allow banks, whose failure would threaten the overall financial system, to pay claims and outstanding borrowings as they fell due;
• ensure that banks whose failure would threaten the overall financial system would have sufficient capital to cushion them from losses caused by further deterioration in the financial markets; and
• encourage banks to lend to creditworthy borrowers.

The Treasury’s support to the banks included:

• Recapitalisation of Lloyds Banking Group (Lloyds) and Royal Bank of Scotland (RBS) through a series of transactions eventually acquiring 83 per cent of RBS (but 68 per cent of the voting rights) and 41 per cent of Lloyds (of both ordinary shares and voting rights).
• Lending money to the Financial Services Compensation Scheme so it could guarantee customer deposits of up to £50,000.
• Lending directly to insolvent banks so they could repay customer deposits of over £50,000, including to London Scottish Bank, Dunfermline Building Society and the Icelandic Banks – Heritable, Kaupthing Singer and Friedlander, and Landsbanki.
•  Nationalising Northern Rock and Bradford & Bingley to protect their depositors and facilitate the orderly unwinding of their obligations and the Treasury’s guarantees.
• The Special Liquidity Scheme, introduced in April 2008, to increase the liquidity of UK banks. It is a Bank of England scheme, supported by a Treasury guarantee, and allows banks to swap assets for more liquid Treasury Bills in return for a fee.
• The Credit Guarantee Scheme, introduced in October 2008, to help restore investor confidence in bank wholesale funding by guaranteeing certain unsecured debts in return for a fee.
• The Asset Protection Scheme, announced in January 2009, to protect assets on banks’ balance sheets. RBS and Lloyds initially agreed in principle to join, but in the end only RBS joined.
• The Asset Backed Securities Guarantee Scheme to guarantee high-rated mortgage-backed securities.

There were two types of support provided:

• Provision of guarantees and other non-cash support. The main items under this heading are the Credit Guarantee Scheme, Special Liquidity Scheme and Asset Protection Scheme, as well as various other guarantees and indemnities provided to UK banks.
• Provision of cash in the form of loans to the Financial Services Compensation Scheme and insolvent banks to support deposits, and the purchase of share capital in Royal Bank of Scotland and Lloyds Banking Group.

These figures set out our calculation of the total peak support provided to banks, including support that was made available but not used by a specific institution. They are calculated by adding all the support schemes together and removing overlaps. It differs from some previous figures we have given, which were calculated as all the support outstanding at specific points in time, and excluded certain schemes which were available but not used.

The peak values have been taken from HM Treasury Resource Accounts, Parliamentary supply estimates and NAO reports to Parliament. As each scheme and support facility was available at different times, the total £1,161.88 billion peak support was not available at a single point in time.

Break-downs of these figures are set out in the C&AG’s report on HM Treasury’s 2010-11 Resource Accounts.

All use of the sector-wide support schemes is included in the figures at the top of the table, so the use of sector-wide support schemes by the named institutions is not shown.

Further information and notes to these figures are set out in the C&AG’s report on HM Treasury’s 2010-11 Resource Accounts.

The total current level of support provided to banks has fallen significantly from its peak level. This is because some support schemes have closed to new entrants without being used; some of the guaranteed debts and assets in the schemes have matured and been repaid; some guarantees to bank depositors and wholesale funders have been removed; and banks have started to repay some of the Treasury loans.

Our most recent estimate of the outstanding support is set out in the C&AG’s report on HM Treasury’s 2010-11 Resource Accounts.

Furthermore, the Treasury retains the unquantifiable ultimate risk of supporting banks should they threaten the stability of the overall financial system again.

Of the £132.85 billion cash provided, banks and the Financial Services Compensation Scheme had made net repayments of £8.92 billion as at 31 March 2011.

The guarantees and non-cash support have also fallen. We reported in July 2011 that banks participating in the three largest support schemes were continuing to make progress towards exiting from the support schemes (Figure 6, Figure 7 and Figure 8) in the C&AG’s report on HM Treasury’s 2010-11 Resource Accounts.

It is likely that a substantial proportion of these schemes and investments will be with us for some time and the eventual profit or loss to the taxpayer will not be known until all the support is removed, the loans repaid and the shares sold.

How much the taxpayer will receive will depend on a number of different factors:

• The eventual proceeds from the disposal of the shareholdings in Royal Bank of Scotland (RBS) and Lloyds Banking Group (Lloyds). The 90.6 billion shares in RBS were purchased at an average cost of 50.53 pence each and the 27.6 billion shares in Lloyds cost 74.4 pence on average. This excludes the dividend access share in the RBS that was purchased for 50 pence but had a fair value of £2.29 billion as at 31 March 2011.
• Any unrecovered loans The Treasury has impaired various loans made to support depositors in failed banks on the basis that the administrators for the failed institutions are uncertain that there will be available monies to pay the creditors in full. These impairments amount to £1.69 billion as at 31 March 2011. The Treasury has stated its intention to continue to pursue these loans in full.
• Any amounts the Treasury is called upon to payout under its guarantees. We reported that as at 13 July 2011, the Treasury, Bank of England and Asset Protection Agency continued to believe that the most likely scenario is that the taxpayer will not have to pay out significantly on its guarantees.
• Costs arising from the additional government borrowing raised to finance the purchase of the shares and loans. We estimate the total financing costs of the financial stability measures are currently £5 billion a year.
• Any fees and income received. As at 31 March 2011, the Treasury had received a total of £11.74 billion in fees and interest for providing the support and assuming the risks covered by the guarantees since 2008. To date, this has offset the financing cost but, in future, the Government is likely to bear a net financing cost until the shares are sold and loans repaid.

Furthermore, the Treasury retains the unquantifiable ultimate risk of supporting banks should they threaten the stability of the overall financial system again.

Banks in receipt of support from the Government pay a fee or interest charge for most of the support packages provided. As at 31 March 2011, the Treasury had received a total of £11.74 billion in fees and interest for providing the support and assuming the risks covered by the guarantees since 2008. The NAO has also reported that:

• the fees and interest may not cover the costs of providing the support in future;
• the fees on the guarantees do not fully compensate the taxpayer for all the risks assumed by the taxpayer in providing the guarantees.

These shortfalls have mainly arisen owing to limitations in the banks’ ability to pay for the support.

In particular we have reported that:

• the Credit Guarantee Scheme provided banks with the advantage not only of being able to access wholesale funding when it might not otherwise be available, but at a cheaper rate than the bond markets were trading their existing debt. We estimate this latter benefit is substantially more than £1 billion;
• the Treasury set a minimum fee on the Asset Protection Scheme of £2.5 billion for Royal Bank of Scotland. Our analysis of cash flows suggested that a minimum fee in the range £1.4 billion‑£4.4 billion could have been justified without breaching minimum capital requirements, with the weight of analysis pointing towards the upper end of the range.
• Many of the loans charge an interest that is below the government’s cost of borrowing. The Treasury’s March 2011 accounts indicate a £7.23 billion future direct cost to the taxpayer arising from providing the loans at an interest rate below the Government’s borrowing cost. 98 per cent of this subsidy is to the wholly-owned mortgage providers, and profits generated by these institutions will eventually be returned to the Exchequer.

A breakdown of the income received by the Treasury for providing the support is set out in the C&AG’s report on HM Treasury’s 2010-11 Resource Accounts.

We reported in 2009 that "if the support measures had not been put in place, the scale of the economic and social costs if one or more major UK banks had collapsed is difficult to envision. The support provided to the banks was therefore justified, but the final cost to the taxpayer of the support will not be known for a number of years."

We have also produced a series of more focused evaluative reports on the value for money achieved by individual parts of the support schemes. Whilst we believe that the overall support package was justified, these reports attempt to look at whether each part was put together in the optimum way. They include:

• HM Treasury: The nationalisation of Northern Rock
• HM Treasury: The Asset Protection Scheme
• Stewardship of the wholly-owned banks: buy-back of subordinated debt

We expect we will continue to update Parliament on the status of the support schemes so long as they remain material to the public finances.