Banking bailout was justified, says NAO
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The National Audit Office has ruled that the £850bn of government support provided to UK banks was justified, though admits the true cost to taxpayers won’t be known for years to come.
It acknowledges that the purchases of shares by the public sector as well as offers of guarantees, insurance and loans had to happen as the economic and social cost would have been far greater had one or more of the major banks collapsed.
Yet the NAO says that despite the unprecedented scale of support for the banking sector lending to businesses is unlikely to meet targets for 2009/2010.
Under the terms of the bailout Royal Bank of Scotland and Lloyds Banking Group agreed to meet targets for mortgage lending and business lending.
RBS pledged to lend an additional £25bn in 2009-10 and Lloyds Group committed to an additional £14bn.
The NAO says that to date, both banks are on track to meet their mortgage lending commitments but lending to businesses is likely to fall short of the targets.
The Treasury is monitoring progress and meets each of the banks regularly.
The only formal sanction available if targets are not met is a potential refusal to extend guarantees for wholesale borrowing under the Credit Guarantee Scheme.
The Treasury estimated in April that there may be a loss to the taxpayer of between £20bn and £50bn, depending on losses from the Asset Protection Scheme and the price at which the government sells its holdings in Royal Bank of Scotland and Lloyds Banking Group.
The Treasury expects by April 2010 to have spent £107m on advisers, with just under £100m expected to be refunded by the banks.
Two sets of financial advisers - from Credit Suisse and Deutsche Bank respectively - were each appointed on retainers of £200,000 a month for a year.
The contracts included provisions for success fees of up to £5.8m, payable at the Treasury’s discretion.
Amyas Morse, head of the NAO, says: “It is difficult to imagine the scale of the consequences for the economy and society if major banks had been allowed to collapse.
“But the big question is what all of this will eventually cost the taxpayer.
“This will take time to answer.
“What we do know is that how the eventual sale of RBS and Lloyds is managed will be crucial to protecting the public interest.
“The structure of the UK banking system has changed beyond recognition.
“When it comes to selling its stakes in the banks, the government has to be mindful of the proceeds for the taxpayer but also of the implications for competition in the UK market, so that customers get a fair deal.”
Readers' comments (1)
Anonymous | 4 Dec 2009 11:08 am
This article raises a few concerns in my mind principally the continuing emphasis on the lack of lending. Whilst I know that obtaining relatively cheap unsecured/business borrowing is difficult, and I'm also quite sure that many lenders are taking advantage of the shortage of supply, but why oh why aren't commentators hitting at the basic problem. The tripartite regulation of the industry allows for the Treasury and the State to moan about the lack of lending whilst the FSA keeps putting up the liquidity requirements, most of which have to be in gilts. So a lender has to compete with state run financial institutions for retail funds and is having to pay something around 3% just to stand still. Then something like 30% of that investment money has to go to Government stock paying less than 0.5%. The shortfall of 2.5% plus a margin plus capital adequacy plus contributions to the FSCS etc then has to be charged back to the customer and hence higher mortgage/borrowing rates. I understand the paranoia with high liquidity but the truth is that if the public lose confidence in a bank or building society it doesn’t matter whether they have 20% or 30% liquidity it still won’t stop a run. The flip side however is that the extra 10% set aside is both losing the lender money and depriving the market of more lending funds.
It is also interesting that the imprudent/high risk lenders have now gone (or are being supported by the State) and the prudential lenders are picking up the tab.
My other concern is that I suspect that most of the large banks will, in 5 years time, once again have good looking share prices but that the State will sell these off early because of all of the emphasis on State bailouts and the drain on the economy etc. In simple terms the banks may prove to be a good investment for the State but only if the shares are sold for commercial and not for political reasons.
I’m worried that too many economic commentators are concentrating on the sensational. The truth is that we are where we are and must make the most of the situation not put the boot in and stifle both the chances of a quicker recovery but also force the State into selling of assets cheaply for political expediency and thereby foisting more burden on the taxpayer.
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