The Government undertook a number of interventions in the financial sector in response to the financial crisis and subsequent recession of the late 2000s. This box provided an update of the estimated net effect of them on the public finances as of December 2013.
We have certified the Treasury’s approach for calculating the net loss or gain to the taxpayer of the interventions to stabilise the financial system. In particular, these are:
- equity injections into Royal Bank of Scotland (RBS), Lloyds Banking Group (LBG) and Northern Rock plc;
- the Asset Protection Scheme (APS);
- bank funding support through the Special Liquidity Scheme (SLS) and Credit Guarantee Scheme (CGS);
- holdings in Bradford & Bingley (B&B) and Northern Rock Asset Management (NRAM); and
- other loans through the Financial Services Compensation Scheme (FSCS), various wholesale and depositor guarantees and a contingent capital facility (CCF).
The APS, SLS and CGS have now closed, with net gains to the Exchequer of £5.0 billion, £2.3 billion and £4.3 billion respectively. Underwriting fees of £0.7 billion relating to the RBS and LBG share purchases and a further £1.3 billion relating to the RBS CCF, due to close this month, have not previously been counted by Treasury in their estimates of the total cost of interventions, but are now. These figures have been captured in PSNB.
The Treasury paid £66 billion for shares in the two banks. The market value of the shares at the time of purchase was £53 billion, with the difference of £12.4 billion added to PSND. This market value includes an estimate for the value of the Dividend Access Share (DAS) in RBS, which gives the Treasury enhanced dividends rights if RBS were to pay dividends on ordinary shares as long as the share price remains below 650p. Changes in the market prices of the Government’s shareholdings in RBS and LBG are not reflected in PSNB and PSND until shares are sold. The Treasury sold £3.2 billion of LBG shares in September 2013, at a price above their implied value on the public sector balance sheet (but only fractionally more than it paid for them), reducing PSND by £0.6 billion. Excluding the DAS, the value of the shares sold, plus the latest volume-weighted average market prices for the remaining shares, imply a total loss of £15.3 billion on the equity shares, relative to an implied loss of £19.8 billion reported in March.
Following its review of RBS, the Treasury announced it is in advanced negotiations to simplify the bank’s capital structure by retiring the DAS. The DAS is valued at £1.5 billion in the Treasury’s latest accounts. This value is uncertain as the DAS is not traded.
The Treasury continue to assume that the other interventions, including holdings in B&B and NRAM, will not materially affect the aggregate loss or gain. Although the Exchequer is expected to recover its support for B&B and NRAM in cash terms, there may be a net present value cost once risk and the delay in proceeds are considered.
Overall, their approach implies an estimated direct loss to the taxpayer on the financial interventions of £0.3 billion, including the DAS and fees that were not included in their earlier estimates. This is smaller than the comparable estimate in March of £4.6 billion, as LBG’s stock market value has risen. If all interventions were financed through debt, the Treasury estimate that additional debt interest costs would have totalled £17.4 billion over the 64 months to date.