Report on maintaining stability across the banking system released

• Report: Maintaining financial stability across the United Kingdom's banking system
• Committee of Public Accounts
• HM Treasury (external site)

Edward Leigh MP, Chairman of the Committee of Public Accounts, said:

"Faced last year with escalating turmoil in our banking system, the Treasury stepped in with an incredible £850 billion worth of support – taking the form of loans to and the purchase of shares in banks; guarantees to support borrowing by banks; and the insurance of assets held by RBS.

"This provision of support maintained financial stability and protected retail depositors. What is highly uncertain is what the Treasury’s actions will eventually cost the taxpayer – government estimates vary considerably. Hundreds of billions of pounds are at stake, with much turning on how good a price can be obtained when the shareholdings are eventually sold off.

"And the poor performance of the bailed out banks, most notably RBS and the Lloyd’s Banking Group, in meeting commitments to lend to struggling businesses has occasioned widespread dismay. The Treasury does not seem to know why the banks are not lending and has few sanctions available to make them change their minds.

"To those of us who attach the highest importance to adhering to Parliamentary procedure, it was of significant constitutional importance that the Chancellor failed for 13 months to notify Parliament of an £18 billion indemnity his department had granted to the Bank of England, against potential losses in providing emergency support to RBS and HBOS."

In the Committee's 12th Report of this Session, MPs said banks are vital to the functioning of the economy. In 2007, financial institutions across the world began to encounter difficulties raising the funds needed to keep their operations going, leading to a crisis of confidence in the banking system. In response, governments have intervened to support the financial system.

The complexity of the problems across the financial sector and the speed with which events unfolded presented the Treasury and the other Tripartite Authorities with a formidable challenge.

There have been no disorderly failures of UK banks, and no retail depositor in a bank operating in the UK has lost money. Ultimately success will be linked closely with sentiments and events in world markets. To date a range of indicators, including benchmark interest rates for wholesale funding, bank share prices and the perceived risk of defaults, have stabilised and improved.

Taxpayer Support

But the scale of the support required from the UK taxpayer to maintain financial stability totalling around £850 billion, has been truly staggering. Agreements to purchase shares in and make loans to the banking sector will, by the end of March 2010, result in a net cash outlay of around £117 billion.

The Treasury has also provided guarantees of up to £450 billion to support borrowing by banks and has insured, through the Asset Protection Scheme, over £280 billion of assets held by the Royal Bank of Scotland.

Compared to its handling of the Northern Rock crisis in 2007, the Treasury was better resourced to contain the wider crisis that erupted in Autumn 2008, but its small team was seriously stretched. In responding to the crisis it was heavily reliant on the use of external advisers.

The terms it agreed with its investment bank advisers included the use of retainers for long periods; and allowed for the potential payment of success fees in situations where no success criteria were specified, a practice wholly inappropriate in the public sector, the report said.

Lending to business, vital to the recovery of the economy, is falling short of legally-binding commitments entered into by two of the banks that received the most support: the Royal Bank of Scotland (RBS) and Lloyds Banking Group.

An indemnity given to the Bank of England by the Treasury was not notified to the Committee’s Chairman, in contravention of long-established Parliamentary procedure. As a constitutional safeguard, departments are required to notify Parliament of contingent liabilities and, where confidentiality is necessary, have been able to do so by informing the Chairs of the Committee of Public Accounts and the relevant departmental select committee. This convention was flouted in this instance, the report concluded.

Despite the enormous amounts of taxpayers’ money at stake the National Audit Office has not been able to examine directly the actions of the Financial Services Authority and the Bank of England. We welcome the recent announcement that the National Audit Office will shortly be appointed as auditor of the Financial Services Authority, but this leaves the Bank of England as the only member of the Tripartite Authorities not audited by the National Audit Office.

The final cost of the schemes to the taxpayer remains uncertain and will not be known for a number of years, The Committee says. The priority now is to get the best value for the taxpayer from the huge sums of public money invested in the banks. The Treasury will have to get its timing right when sales are launched, as well as putting in place well thought through sales processes which take account of lessons learned from past sales.