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). Because Lloyds and RBS continue to issue ordinary shares, for example as part of employee remuneration schemes and to fund the payment of dividends on preference shares, the taxpayer ownership has reduced to 81.7 per cent of RBS (66.1 per cent of voting rights) and 39.8 per cent of Lloyds as at 31 March 2012.
• 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 and lasting until January 2012, to increase the liquidity of UK banks. It was a Bank of England scheme, supported by a Treasury guarantee, under which banks to swapped 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.

This list excludes loans and commitments to other countries and wider interventions to support the economy, such as the Bank of England’s Quantitative Easing.

The financial crisis has continued and the Treasury, working with the Bank of England, is establishing new schemes to promote lending to UK businesses and protect the UK economy. These are described in Part Three of the C&AG’s Report on HM Treasury’s 2011-12 Resource Accounts.

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. They are the latest available figures as at 31 March 2012.

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 peak support was not all 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 2011-12 Resource Accounts.

* At the end of 2011, Northern Rock plc was sold to Virgin Money for a price expected to be between £863 million and £977 million, depending on the size and timing of future payments agreed as part of the sale (see The creation and sale of Northern Rock plc for further details on the sale). The £0.65 billion shown in the table is the loss, on the basis of cash received to 31 March 2012, resulting from the sale of the shares at the end of 2011.

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 2011-12 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 been withdrawn; 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 2011-12 Resource Accounts.

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

The total current level of support provided to banks has fallen significantly from its peak level.

The £132.89 billion cash provided has been reduced by £14.03 billion because:

• banks and the Financial Services Compensation Scheme had made cumulative net repayments of £13.28 billion as at 31 March 2012; and
• the £1.4 billion shares in Northern Rock plc were sold to Virgin Money at the end of 2011. The Treasury has received a total of £747 million cash to date with further proceeds expected.

The total £1,029.30 billion guarantees and non-cash support has fallen significantly and stood at £109.17 billion as at 31 March 2012. The Special Liquidity Scheme ended in 2011-12 and the Credit Guarantee Scheme and Asset Protection Scheme continue to reduce (Figure 10 and Figure 11) in.the C&AG’s Report on HM Treasury’s 2011-12 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 shares in RBS and Lloyds were purchased for £66.34 billion and as at 31 March 2012 had a market value of £34.33 billion, a total decrease in value of £32.01 billion. The government remains committed to returning the banks to private ownership; however, UK Financial Investments Ltd, which manages the government’s shares has warned that until economic and regulatory uncertainties subside it will be difficult to deliver value for money from a sale of the shares, and that at least some of the fall in value may represent a permanent cost. This excludes the dividend access share in the RBS that was purchased for 50 pence but had a fair value of £1.80 billion as at 31 March 2012.
• The final return from Northern Rock and Bradford & Bingley. The Treasury expects to recover the cash lent to Northern Rock and Bradford & Bingley, including the loss on the sale of Northern Rock plc, and the cost of the gilts issued to fund the loans, but the taxpayer may not be compensated for the risk taken on or the opportunity cost of the money lent. This could produce a net present cost of some £3 billion.
• 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. 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 and support schemes. 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. Of the three largest support schemes, the Special Liquidity Scheme ended without payout in 2011-12 ; the Credit Guarantee Scheme reduced significantly over 2011-12 and will be wound up by the end of October 2012; and the Asset Protection Agency, which administers the Asset Protection Scheme reported that before there was a payout on the Asset Protection Scheme the economic climate would have to deteriorate rapidly and dramatically to levels where banks around the world would be facing significant difficulties.
• 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 £5 billion a year and have totalled £16 billion to 31 March 2012.
• The fees and income received. As at 31 March 2012, the Treasury had received a total of £14.36 billion in fees and interest for providing the support and assuming the risks covered by the guarantees since 2008. This is now below the cumulative finance cost of £16 billion and, unless the shares in RBS and Lloyds Banking Group start paying substantial dividends, the government as a whole will make annual cash losses on the support once the cost of borrowing the money to purchase the shares and provide the loans is taken into account.

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 £14.36 billion in fees and interest for providing the support and assuming the risks covered by the guarantees since 2008.

The income generated by fees and interest is less than would be expected from a normal market investment and has not compensated the taxpayer for the degree of risk accepted by taxpayers in providing the support. Once the opportunity cost and risks are factored in, the schemes have represented a transfer of at least £5 billion from taxpayers to the financial sector. This does not include the cost of holding the shares which have not paid a dividend or seen a capital gain. Further details are set out in Figure 8 of the C&AG’s Report on HM Treasury’s 2011-12 Resource Accounts.

The fees and interest were generally set with a view of what the recipient banks could afford at the time, in keeping with the schemes’ aims for financial stability. The £5 billion can be regarded as part of the cost of preserving financial stability in the crisis, and as I reported in 2009, had the support not been provided, the potential costs would have been difficult to envision.

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 (March 2009)
• HM Treasury: The Asset Protection Scheme (December 2010)
• Stewardship of the wholly-owned banks: buy-back of subordinated debt (March 2011) ·
• The creation and sale of Northern Rock plc (May 2012)

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.