Managing Government interventions in the financial sector: frequently asked questions

Q. What is the Government’s exposure to the banking sector as a result of the financial crisis?

During the financial crisis, a number of steps were taken by the previous Government to stabilise the sector. The Treasury’s support to the banks at this time included:

Recapitalising Lloyds Banking Group (LBG) and Royal Bank of Scotland (RBS) – which resulted in the Government acquiring a shareholding in these firms;
Taking Northern Rock and part of Bradford & Bingley into temporary public ownership; and
Introducing a series of schemes to increase liquidity and confidence in the sector. These included: the Special Liquidity Scheme, administered by the Bank of England; the Credit Guarantee Scheme; the Asset-backed Securities Scheme and the Asset Protection Scheme.

The Government remains exposed to the banks through the above schemes and shareholdings, however total exposure has fallen steadily since the height of the crisis in 2008. Northern Rock plc was sold in January 2012, though the Government remains exposed to Northern Rock Asset Management (NRAM).

There are also a number of smaller interventions, relating to building societies such as Dunfermline and London Scottish and loans to cover the losses of some Icelandic institutions.

The eventual direct fiscal cost from the support provided by the previous Government to the financial sector will be dependent on a number of factors, including the eventual sale price achieved for the shares in Royal Bank of Scotland and Lloyds Banking Group.

The Office for Budget Responsibility (OBR) is responsible for producing the official estimate of the final net cost to the taxpayer from the interventions to stabilise the financial sector. Their latest estimate, contained in the Autumn Economic and Fiscal Outlook 2011, was an expected net loss to the taxpayer of £25.6bn.

Q. Is there an estimate of the expected cost of intervening in the financial sector?

The Office for Budget Responsibility (OBR) is responsible for producing the official estimate of the final net cost to the taxpayer from the interventions to stabilise the financial sector.

The OBR certifies the Treasury’s approach for calculating the overall direct net cost or benefit to the taxpayer of the interventions to stabilise the financial sector. This is highly uncertain and will depend in large part on the eventual sale price for the Government’s shareholdings in RBS and LBG, which it is not possible to predict with any confidence. The Treasury’s approach therefore uses market prices to value these shares.

The most recent OBR estimate for the expected net cost to the taxpayer of the financial sector interventions is contained in their Autumn Economic and Fiscal Outlook 2011.

OBR document (PDF)

Q. What has the cost of the financial crisis been to the wider economy?

The economic cost of the crisis – in which the UK and other major markets entered a prolonged period of recession – has been significant.

Between 2002 and 2007, there was a near tripling of UK bank balance sheets and the UK financial system had become one of the most highly leveraged in the world – more so than the US. As a result, the UK was particularly vulnerable to financial instability and was hit hard by the financial crisis. The loss of confidence and withdrawal of credit that followed precipitated the deepest and longest recession since the Second World War.

The Government takes the view that now is the opportunity to make lasting reform to financial services to put the sector on a sustainable footing and mitigate the likelihood and virulence of future financial crises. In the UK, this involves overhauling the regulatory framework by abolishing the Financial Services Authority and transferring macro-prudential regulation, including the monitoring of financial stability, to the Bank of England.

In addition, the Government has announced a series of measures to increase the supply of credit to businesses. To find out more, view the following pages

Q. What is the size of the Government’s various shareholdings in the banking sector?

The Government’s shareholding can be summarised as follows:

Bank	Initial date of intervention	Shareholding
Northern Rock	February 2008	Northern Rock was split into Northern Rock plc and Northern Rock Asset Management (NRAM) at the beginning of 2010. Northern Rock plc was returned to the private sector in January 2012. NRAM is now managed by UK Asset Resolution (UKAR).
Bradford & Bingley	September 2008	Majority of assets sold to Abbey National (later acquired by Santander); the remainder in wind-down and 100% owned by Government . As with NRAM, Bradford & Bingley is managed by UKAR.
Royal Bank of Scotland	October 2008	82%
Lloyds Banking Group	October 2008	40%

Q. How is the Government’s shareholding in the banks managed?

The Government’s policy is to manage its shareholdings in financial institutions on a commercial, arms-length basis. It does this through the Government owned company UK Financial Investments Limited (UKFI), which was established in November 2008.

UKFI is responsible for developing and executing the sales of Government shares in RBS and Lloyds Banking Group, as well as the sale of Northern Rock plc (one of two banks created out of the former Northern Rock).

UKFI also oversees the work of UK Asset Resolution Limited (UKAR) – the holding company created in October 2010 to bring together the orderly winding down of Bradford & Bingley plc (B&B) and Northern Rock Asset Management (NRAM) in order to maximise value for the taxpayer.

Unlike Northern Rock plcwhich has now been returned to the private sector, NRAM encompasses the ‘closed’ mortgage business books of Northern Rock. As such, when customers’ existing mortgage deals come to an end, they remain on the NRAM standard variable rate (SVR) or remortgage with another lender.

UKFI’s overall objective is to dispose of the Government’s holdings in an orderly manner, protecting and creating value for the taxpayer, paying due regard to financial stability, and promoting competition. More information on UKFI’s investment mandate and how it is managing the Government’s shareholding can be found on the UKFI website (opens in new browser).

Q. Why doesn’t the Government use its shareholding to force the banks to lend more?

The Government firmly believes that the banks need to be managed at arm’s length for them to remain commercially viable in the eyes of the market. This will allow in time for the effective disposal of Government shares, which is in the best interests of the taxpayer. Decisions about whether to lend to specific individuals or businesses remain commercial decisions for banks and building societies to determine themselves.

In 2011, the Government finalised Project Merlin, where the five largest banks in the UK committed to lend £190bn in new credit to business, up from £179bn in 2010. In the event, as part of the agreement RBS and Lloyds Banking Group contributed to an overall total of £214bn of gross lending to UK businesses in 2011.

Q. When does UKFI plan to dispose of the Government’s shareholdings?

Any decisions on the sale of Government holdings must be taken in the context of changing economic and market conditions. As a result, UKFI does not have a predefined timetable for the exit of Government shareholdings. Any recommendations to sell will be based on value to the taxpayer, financial stability and competition within the financial sector.

The overarching intention to return Northern Rock plc to the private sector has been achieved. UKFI also intends to gradually wind down Northern Rock Asset Management alongside Bradford & Bingley.

Q. Where can I find more information about the Government’s financial sector interventions?

There are a series of reports which may be read in addition to this information: