The previous Government made a number of interventions to support the financial sector in 2008-09 and 2009-10. These included: establishing the Credit Guarantee Scheme and indemnifying the Bank of England’s Special Liquidity Scheme; the recapitalisation of the Royal Bank of Scotland (RBS) and Lloyds Banking Group (LBG); taking Northern Rock and Bradford & Bingley into public ownership; providing support for depositors in London Scottish Bank plc, Dunfermline Building Society and Icelandic banks; and establishing the Asset Protection Scheme.
The eventual overall direct net cost or benefit to the taxpayer of these interventions is highly uncertain. It will depend on the extent of the recovery in the financial sector and on factors that are not possible to predict with any confidence, such as the final sale price of shares in RBS and LBG. We have certified Treasury methodologies to estimate a total net cost on the basis of current market prices and, where these are not available, on an assessment of the fees and losses associated with the interventions. Using latest market prices, this suggests an estimated eventual benefit to the taxpayer of £2 billion, including fees and other income. This is based on:
- the current market value of the Government’s shareholdings in RBS and LBG implies a cost of £3 billion on these investments, net of the value of the Dividend Access Share in RBS and fees received during the capitalisation and for the provision of contingent capital;
- the Asset Protection Agency’s (APA) central expectation, set out in its annual report in July 2010, that losses on the assets in the scheme will not exceed the first loss borne by RBS and consequently that there will be a net benefit to the taxpayer of at least £5 billion from the Asset Protection Scheme; and
- the expectation that the aggregate costs of all other interventions will not be material after fees, income and recoveries are taken into account.
This estimate is highly sensitive to movements in the share prices of RBS and LBG. For example, a 10 per cent fall or rise from current levels would reduce or increase the estimate by around £10 billion. It will also be sensitive to any future changes in the APA’s expectation of losses on assets in the scheme and hence of the net benefit to the taxpayer from the APS.
The exposure of UK banks to Irish liabilities may affect this estimate. The Treasury updated its estimate of the market value of RBS and LBG using market prices on 24 November, so capturing the market’s assessment at that point of this exposure. The estimate of potential losses from the Asset Protection Scheme was published in July before the recent developments. However, the APA’s view is that these developments will not change its central expectation that there will be a net benefit to the taxpayer of at least £5 billion from the Asset Protection Scheme.
This estimate only reflects the potential direct costs and benefits of the interventions. It does not include the debt interest costs due to the additional Government borrowing necessary to fund the interventions. Nor does not it attempt to estimate the much wider impact of the financial crisis on the economy.
Paragraph 4.124 sets out how the transactions related to the financial sector interventions are treated in the November forecast.