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Government Bank Rescues:Financial Consequences

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Government Bank Rescues:Financial Consequences BRIEFING PAPER Number 05748, 3 May 2017 Government bank By Timothy Edmonds rescues: financial consequences Inside: 1. Introduction 2. Bank recapitalisation 3. Other Support Mechanisms 4. Other institutions supported 5. How much did it cost? www.parliament.uk/commons-library | intranet.parliament.uk/commons-library | [email protected] | @commonslibrary Number 05748, 31 March 2017 2 Contents Summary 3 1. Introduction 4 2. Bank recapitalisation 5 2.1 Royal Bank of Scotland 5 2.2 Lloyds Banking Group 7 3. Other Support Mechanisms 11 3.1 Credit guarantee scheme 11 3.2 Special liquidity scheme 11 3.3 Asset Protection Scheme 11 4. Other institutions supported 14 4.1 Northern Rock 14 4.2 Bradford & Bingley 16 4.3 Icelandic banks 16 5. How much did it cost? 18 3 Government bank rescues:financial consequences Summary This Paper gives some basic numbers concerning the government’s net expenditure on banks rescued during the financial crisis of 2008-9 and the debts owed to it by other organisations. The really large sums invested by government were spent recapitalising HBOS, Lloyds Banking Group and the Royal Bank of Scotland and establishing the vehicle to hold ownership of Northern Rock and Bradford & Bingley. The then Chancellor, Alistair Darling, initiated recapitalisation measures of up to £17 billion for Lloyds and HBOS and £20 billion for RBS. All of the shares in Lloyds have been sold back to the market; government continues to own a substantial portion of RBS. The question – how much did the rescue cost? – cannot be answered for certain. The investment in Lloyds produced a ‘profit’ and it is likely that the government will have a positive return on at least some of its other assets. Against that, it looks unlikely that the investment in RBS will be positive. In June 2015 the Chancellor announced that the Government would start the process of selling its stake in RBS however, this process was halted due to market volatility and has yet to restart. Substantial assets of the other rescued banks have been sold to financial investors and the good parts of some banks are now part of other banks. There is a descriptive timeline of events from 2007 to 2015 produced by the ONS available here. Number 05748, 31 March 2017 4 1. Introduction From September 2007 to 2009 the then Labour Government initiated a number of schemes to support the banking sector generally and several banks specifically. It also committed significant amounts (over £100 billion) of public money to ensure that the UK system remained viable. More detail on the chronology of the government rescue and about the schemes can be found in another standard note (SN/BT/4968). This note looks at the recent financial consequences of those decisions. It does not answer the question “how much the rescue cost” since that will not be known for a considerable period, although a preliminary estimate of £2 billion by the Treasury is shown in this note. The level of support for the banking sector as at December 2010 was estimated by the Comptroller & Auditor General as £512 billion.1 An estimate by the National Audit Office (NAO) at 31 March 2015 put the outstanding support at £115 billion, of which £93 billion was cash outlays.2 The NAO has a very informative series of FAQs on its website here, which are updated periodically. The cost of the rescue packages collectively is still positive, dominated by the holdings of RBS. There is a descriptive timeline of events from 2007 to 2015 produced by the ONS available here. 1 Quoted Maintaining Financial Stability of Banks, Public Accounts Committee, p7, 32nd Report 2010-12 HC 973 2 National Audit Office 5 Government bank rescues:financial consequences 2. Bank recapitalisation The really large sums invested by government were spent recapitalising HBOS, Lloyds Banking Group and the Royal Bank of Scotland and establishing the vehicle to hold ownership of Northern Rock and Bradford & Bingley. In his statement on 13 October 2008 the then Chancellor, Alistair Darling, announced recapitalisation measures of up to £17 billion for Lloyds and HBOS and £20 billion for RBS. This meant that the government bought shares in the banks, which it is now starting to sell back to market in stages. A National Audit Office (NAO) Report in September 2015 summed up previous activity: To maintain financial stability, in 2008, the government invested £107.6 billion to acquire a controlling equity stake (84%) in Royal Bank of Scotland (RBS), a 43% stake in Lloyds Banking Group (Lloyds) and create UK Asset Resolution (UKAR). In 2010, it acquired the whole of Northern Rock, and Bradford & Bingley. As a result of these interventions, two companies were created: UKAR to manage the mortgage and loan portfolio of Northern Rock and Bradford & Bingley; and UK Financial Investments (UKFI) to manage HM Treasury’s shareholdings in Lloyds, RBS and UKAR on behalf of HM Treasury. UKFI manages the investments on a commercial basis and does not intervene in day-to-day management decisions of investee companies. It engages actively with UKAR in a manner similar to that in which a financial sponsor would engage with a wholly-owned portfolio company. The government plans to return £51.1 billion of these investments to the private sector in this parliament.3 All government shareholdings are managed by United Kingdom Financial holdings (UKFI). 2.1 Royal Bank of Scotland A list of the government market holdings in Royal Bank of Scotland (RBS) (pre-disposal programme) is shown below: 3 NAO; Financial institutions landscape; HC418 September 2015 Number 05748, 31 March 2017 6 Government investment in Royal Bank of Scotland Shares Total Investment investment per share millions £millions pence Initial recapitalisation Dec-08 2,285 14,969 655 Preference share conversion Apr-09 1,679 5,058 318 APS B shares Dec-09 5,100 25,500 500 Total investment 9,064 45,527 502 (avg) Fees received 305 Total investment net of fees 9,064 44,014 486 (avg) and DAS dividends APS exit fee 2,504 Contingent Capital Facility Fees 1,280 Total investment net of all fees & dividends 9,064 39,925 440 (avg) Source: UKFI Annual Report 2015/16; Library calculations At the Mansion House Speech in June 2015 the then Chancellor, George Osborne, announced the Government’s intention to dispose of its shareholding in RBS, even if it produced an accounting loss on the value of shares sold: Do we begin the process of selling down the government’s huge majority stake, even though the share price is still below what the last Chancellor paid out seven years ago? Or, do we hope against hope that something will turn up? Frankly, in the short term the easiest path for the politician is to put off the decision and leave it to someone else at some future time to pick up the pieces. I’m not interested in what’s easy – I’m interested in what’s right. I was not responsible for the bailout of RBS or the price paid then for shares bought by the taxpayer: but I am responsible for getting the best deal now for the taxpayer and doing whatever I can to support the British economy. There is no doubt that starting to sell the government’s stake in RBS is the right thing to do on both counts. That is not just my judgement – it is the judgement of the Governor of the Bank of England, whose views I sought and whose letter to me on the issue we publish today. In the Governor’s words: “it is in the public interest for the government to begin now to return RBS to private ownership”.4 RBS’s share price rose by six pence in the morning following the announcement. On 3 August 2015 UKFI signalled the start of the sale: UKFI announces that it intends to sell part of HM Treasury's shareholding in The Royal Bank of Scotland Group plc (the "Company"). The disposal of these shares (the "Placing Shares") will be by way of a placing to institutional investors (the "Placing"). […] 4 Mansion House speech 10 June 2015 7 Government bank rescues:financial consequences The Placing is expected to comprise of approximately 600m of the Company's ordinary shares, representing approximately 5.2% of the economic ownership of the Company. As a result of the Placing, the overall size of HM Treasury's economic interest in the capital of the Company (which includes its holding of ordinary shares and B shares in the Company) will be reduced from approximately 78.3% to approximately 73.2% and its holding of ordinary shares in the Company will be reduced from approximately 61.3% to approximately 52.0%.5 The sale was to institutions only. Citigroup, Goldman Sachs, Morgan Stanley and UBS Limited were appointed to act as Bookrunners in connection with the Placing. The details of the sale are shown below: Government shareholding in RBS, August 2015 - Shares (millions) Remaining Implied share Share holding sale Holding b/fwd August 2015 3,964 Notified sale 4 August 2015 3,334 630 Source: London Stock Exchange press release; 4 August 2015 The shares were sold at £3.30 per share; proceeds were £2.1 billion. Subsequent to the sale RBS share holdings were re-organised. UKFI set out the details: Following the first share sale, in October 2015 the Government converted its holding of B shares into ordinary shares in RBS. This resulted in no change in the Government’s economic ownership in RBS but an increase in its voting ownership as the Government’s economic and voting ownership were aligned at 72.9 per cent.6 On the basis of previous holdings, less sales, the UK government appears to hold just under 8.5 billion RBS shares.
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