We have certified the Treasury’s approach for calculating the net cost or benefit to the taxpayer of the interventions to stabilise the financial sector. In particular, these are:
- equity injections into RBS, Lloyds and Northern Rock plc;
- the Asset Protection Scheme;
- bank financing support through the Special Liquidity Scheme (SLS) and Credit Guarantee Scheme (CGS);
- loans to Bradford & Bingley (B&B), Northern Rock Asset Management (NRAM), and the Financial Services Compensation Scheme (FSCS); and
- various wholesale and depositor guarantees.
The overall cost or benefit 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. On the basis of the latest volume weighted average market prices this implies a loss of £25.6 billion on these investments, relative to an implied loss of £30.6 billion reported in the November EFO.
The Treasury then uses the Asset Protection Agency’s central projection of a net benefit to the taxpayer from the Asset Protection Scheme of £5 billion, including fee income.
Given the large original exposures, the Treasury have not in the past included income from the SLS or CGS. However, exposure to these schemes has diminished substantially. The SLS has now closed, with fee income of £2.5 billion and no reported losses. By January, there was £47.1 billion of outstanding debt guaranteed by the CGS, from a peak of under £140 billion in 2009. This debt will mature by the end of 2012 and associated fees received to date amount to £4 billion.
UK Financial Investments (UKFI) has published estimates for the repayment of the B&B and NRAM loans. The Government provided £62 billion of funding and, over time, the cash returns are expected to be between £94 billion and 96 billion. However, the outstanding cash returns will be received over the next 10-15 years and on a net present value basis will be relatively small in the context of the original funding provided to both banks. Therefore, the Treasury continue to assume that the cost of these and other interventions will not materially affect the aggregate cost or benefit.
Overall, their approach implies an estimated direct loss to the taxpayer of £14.3 billion. This contrasts to the November estimate of a loss of £25.6 billion, since when RBS’ and Lloyds’ equity values have increased (£5 billion) and other interventions have been quantified (£6 billion).
If all interventions were financed through debt, the Treasury estimate that additional debt interest costs would have totalled £12.5 billion over the 43 months to date.