Northern Rock to cost taxpayer £2 Billion

Treasury failed the taxpayer
Published on Friday, 16 November 2012 08:44
Written by Scott Buckler

The Commons Committee of Public Accounts publishes its 18th Report of Session 2012-13, The Creation and Sale of Northern Rock plc

The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, today said:

"The rescue of Northern Rock is expected to cost the taxpayer some £2 billion.

The Treasury was unable to respond promptly when the banking crisis hit because 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.

Splitting the bank was supposed to generate lending, but the new bank lent only £9.1 billion against a target of £15 billion.

UKFI took over management of the taxpayers' shares in 2010, but it was also too slow to challenge the strategy of Northern Rock even though the bank was losing money.

Once UKFI decided to sell the bank, the sale was handled well, but the taxpayer still lost nearly half a billion pounds.There were only two bidders and it was fortunate that Virgin Money was particularly keen to buy.

The lack of competition does not fill us with confidence that the taxpayer will make a profit on the sale of the two banks which remain in public ownership, RBS and Lloyds. There is a risk that the £66 billion invested in RBS and Lloyds may never be recovered.

It is vital that the final decisions on the wholly owned banks are made with value to the taxpayer taking precedence over speed of exit.

This will not be the last banking crisis, and the next one is likely to be different.  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".

Margaret Hodge was speaking as the Committee published its 18th Report of this Session which, on the basis of evidence from the Treasury and UK Financial Investments, examined the creation and sale of Northern Rock plc.

The run on deposits at Northern Rock in September 2007 was one of the key moments in a financial crisis whose effects continue to be felt today. After nationalising Northern Rock in February 2008, the Treasury eventually decided to split out a new retail bank, ("Northern Rock plc"), for sale, and to run-down the majority of the mortgage assets in a separate public sector vehicle, Northern Rock (Asset Management) plc ("NRAM"). Northern Rock plc was sold to Virgin Money in 2011 for proceeds currently estimated at £931 million, an expected loss of £469 million. The Treasury hopes to recover all the public funds provided to Northern Rock but this is far from certain as it relies on a profitable wind-down of NRAM to offset the loss on the sale of Northern Rock plc. Moreover even if Treasury's predictions are correct there will still be an economic loss, currently estimated at £2 billion, to the taxpayer. It is therefore vital that the final decisions on the wholly owned banks are made with value to the taxpayer taking precedence over speed of exit.

The Treasury accepted its part in a "monumental collective failure" to understand and respond to the emerging banking crisis. The Treasury lacked the skills to understand Northern Rock. It took too long to nationalise the bank and failed to make an effective challenge to the bank's business plan, first after nationalisation in 2008 and again in 2009 when deciding what to do with the bank. Treasury has started to address this lack of capacity: it has established UK Financial Investments ("UKFI") with a small team of 12 people to manage the taxpayer shares in banks, and has conducted a review of its own skills and capacity. But huge challenges remain. The £66 billion cash spent purchasing shares in RBS and Lloyds may never be recovered, and Treasury must also ensure it is prepared to deal with any future crisis, whatever form it may take, when it emerges.

In hindsight, the Treasury's decision to create and sell a new bank turned out to be no worse than any available alternative, because no matter which part of the bank what was sold, or when, a larger amount of assets would need to be retained in public ownership. The decision to split the bank was intended to generate lending, but in public ownership the new bank lent only £9.1 billion against a target of £15 billion. UKFI took over management of the shares in 2010 but Northern Rock plc still lost money in 2011, and its strategy should have been challenged sooner.

There were only two competitors bidding for Northern Rock plc and EU state aid rules required the bank to be sold by 2013. Despite these constraints the sale was well handled, although UKFI were fortunate that Virgin Money were keen to buy in 2011.

Source: ©PAC

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