There is a risk that the £66bn invested in RBS and Lloyds Banking Group by the government may never be recovered, a parliamentary committee has warned
In a report into the sale of Northern Rock, the Public Accounts Committee said the sale of the bank in 2011 was "fortunate", and Lloyds and RBS may not be sold "for many years".
It noted that taxpayers were set to lose £2bn on Northern Rock's rescue. A Treasury aide said it aimed, "to get the best possible value for taxpayers".
"This government is putting right the catastrophic regulatory failings of the last decade that led to the biggest bank bailout in the world," the Treasury aide added.
The government currently owns 40% of Lloyds, and 82% of RBS. BBC business editor Robert Peston said his sources in RBS said it was possible that some shares in RBS could be sold in 2014 but that it was unlikely any shares in Lloyds would be sold before 2015.Lucky timing Northern Rock was rescued in February 2008 by the previous government.
The sale of Northern Rock to Virgin Money in 2011 was carried out by the current government under time pressure, as EU state aid rules required the Treasury to dispose of its holding by 2013.
The committee said that UK Financial Investments (UKFI) - the state-owned body that manages the Treasury's investments in the banks it rescued during the financial crisis - was lucky that Virgin was so keen to buy, given that there were only ever two bidders for the bank.
"The Treasury was fortunate that one of them had a strategic interest in purchasing a small retail bank at the end of 2011," the committee's report said, noting that current market conditions are less favourable than they had been at the time of the sale.
"The low level of competition does not give us confidence that the taxpayer will make a profit on the sale of RBS or Lloyds," it added.
While the Treasury invested £1.4bn in Northern Rock shares, this was small in comparison to the £66bn invested in RBS and Lloyds.
"It seems inevitable that their 'temporary public ownership' will last for some time, if getting value for our investment remains the most important objective for government."
The £2bn price tag for bailing out Northern Rock is not definite, and was drawn by the committee from a report provided to the committee by the National Audit Office (NAO) earlier this year.
The actual losses will depend on whether and how much profit UKFI is able to make from the Northern Rock assets that it did not sell to Virgin, and continues to own.
US profits
The situation in the UK is in contrast to that in the US, where the Treasury Department predicted in April that it would make a profit of $2bn (£1.3bn) from bailing out its banks. However, that was partly because of the different ways that the US and UK bailed out their banks.
The US bought bank bonds and extended various types of loans to the banks, also putting time limits on repayment of the loans. The UK government ended up as an ordinary shareholder in the banks, which meant it would have to wait longer to get money back.
"We had EU issues," said Ralph Silva, banking analyst at SRN. "We couldn't have done the same thing as the US did because the EU would have called it state aid." But Mr Silva added that it was perfectly possible for the UK to make a profit from its bank bailout as long as the government was prepared to wait long enough to sell the shares.
"The time period for the recovery is in doubt, but I don't know anybody who doubts that there will be a recovery, and investment banks like RBS do very well when economies recover."
'Lessons learnt'
Like the NAO, the committee was critical of the Treasury and UKFI - which took over ownership from the Treasury in 2010 - for being too slow to override the Rock's management following the bank's 2008 rescue.
"Northern Rock PLC still lost money in 2011, and its strategy should have been challenged sooner," the report claimed.
The bank also failed to hit a £15bn government lending target during its time in public ownership, achieving only £9.1bn.
The report said that the government should have been more critical of the "optimistic" plan put forward by management for how to split the Rock up into a "good bank" that was sold to Virgin, and a "bad bank" with billions of pounds of problem mortgages that was retained in state ownership.
"The Treasury should ensure that lessons it learns from the sale are captured and can be applied to future disposals, including any sale of RBS or Lloyds."
Margaret Hodge MP, chairman of the PAC, said the rescue of Northern Rock was made more complicated because the Treasury was unable to respond promptly to the banking crisis as "it lacked the right skills and understanding. It was slow to nationalise the bank and that made a loss difficult to avoid.
"The Treasury had spent five months trying to find a private sector buyer before giving up. After nationalisation, it then failed to effectively challenge the optimistic business plan put forward by the bank's management to split the bank."
She predicted that this would not be the last banking crisis, so the "Treasury must ensure it retains the right staff with the right skills to understand the risks and respond effectively.
"It needs to learn the lessons from the creation and sale of Northern Rock and make sure that these are applied in future, including to any sale of RBS and Lloyds."
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It noted that taxpayers were set to lose £2bn on Northern Rock's rescue. A Treasury aide said it aimed, "to get the best possible value for taxpayers".
"This government is putting right the catastrophic regulatory failings of the last decade that led to the biggest bank bailout in the world," the Treasury aide added.
The government currently owns 40% of Lloyds, and 82% of RBS. BBC business editor Robert Peston said his sources in RBS said it was possible that some shares in RBS could be sold in 2014 but that it was unlikely any shares in Lloyds would be sold before 2015.Lucky timing Northern Rock was rescued in February 2008 by the previous government.
The sale of Northern Rock to Virgin Money in 2011 was carried out by the current government under time pressure, as EU state aid rules required the Treasury to dispose of its holding by 2013.
The committee said that UK Financial Investments (UKFI) - the state-owned body that manages the Treasury's investments in the banks it rescued during the financial crisis - was lucky that Virgin was so keen to buy, given that there were only ever two bidders for the bank.
"The Treasury was fortunate that one of them had a strategic interest in purchasing a small retail bank at the end of 2011," the committee's report said, noting that current market conditions are less favourable than they had been at the time of the sale.
"The low level of competition does not give us confidence that the taxpayer will make a profit on the sale of RBS or Lloyds," it added.
While the Treasury invested £1.4bn in Northern Rock shares, this was small in comparison to the £66bn invested in RBS and Lloyds.
"It seems inevitable that their 'temporary public ownership' will last for some time, if getting value for our investment remains the most important objective for government."
The £2bn price tag for bailing out Northern Rock is not definite, and was drawn by the committee from a report provided to the committee by the National Audit Office (NAO) earlier this year.
The actual losses will depend on whether and how much profit UKFI is able to make from the Northern Rock assets that it did not sell to Virgin, and continues to own.
US profits
The situation in the UK is in contrast to that in the US, where the Treasury Department predicted in April that it would make a profit of $2bn (£1.3bn) from bailing out its banks. However, that was partly because of the different ways that the US and UK bailed out their banks.
The US bought bank bonds and extended various types of loans to the banks, also putting time limits on repayment of the loans. The UK government ended up as an ordinary shareholder in the banks, which meant it would have to wait longer to get money back.
"We had EU issues," said Ralph Silva, banking analyst at SRN. "We couldn't have done the same thing as the US did because the EU would have called it state aid." But Mr Silva added that it was perfectly possible for the UK to make a profit from its bank bailout as long as the government was prepared to wait long enough to sell the shares.
"The time period for the recovery is in doubt, but I don't know anybody who doubts that there will be a recovery, and investment banks like RBS do very well when economies recover."
'Lessons learnt'
Like the NAO, the committee was critical of the Treasury and UKFI - which took over ownership from the Treasury in 2010 - for being too slow to override the Rock's management following the bank's 2008 rescue.
"Northern Rock PLC still lost money in 2011, and its strategy should have been challenged sooner," the report claimed.
The bank also failed to hit a £15bn government lending target during its time in public ownership, achieving only £9.1bn.
The report said that the government should have been more critical of the "optimistic" plan put forward by management for how to split the Rock up into a "good bank" that was sold to Virgin, and a "bad bank" with billions of pounds of problem mortgages that was retained in state ownership.
"The Treasury should ensure that lessons it learns from the sale are captured and can be applied to future disposals, including any sale of RBS or Lloyds."
Margaret Hodge MP, chairman of the PAC, said the rescue of Northern Rock was made more complicated because the Treasury was unable to respond promptly to the banking crisis as "it lacked the right skills and understanding. It was slow to nationalise the bank and that made a loss difficult to avoid.
"The Treasury had spent five months trying to find a private sector buyer before giving up. After nationalisation, it then failed to effectively challenge the optimistic business plan put forward by the bank's management to split the bank."
She predicted that this would not be the last banking crisis, so the "Treasury must ensure it retains the right staff with the right skills to understand the risks and respond effectively.
"It needs to learn the lessons from the creation and sale of Northern Rock and make sure that these are applied in future, including to any sale of RBS and Lloyds."
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