In October 2008, the Government put in place measures to support UK banks, including purchases of shares in the Royal Bank of Scotland (RBS) and Lloyds Banking Group (Lloyds). The economic downturn continued to intensify, however, further undermining market confidence in the value of banks' assets.
To restore confidence, the Government launched an Asset Protection Scheme (the Scheme) in January 2009 to protect banks against further exceptional losses on their assets. During negotiations to finalise the Scheme, the Treasury remained alert to developments in the market throughout 2009 and made changes to the Scheme to better protect the taxpayer. As part of the Scheme, Lloyds and RBS agreed to meet published targets for lending to households and businesses.
Following the Scheme's announcement, market sentiment towards the banks stabilised, helping to achieve the Treasury's overriding aim to maintain financial stability. The development and implementation of the Scheme is a noteworthy achievement in which the commitment and skills of Treasury staff played a central part. Against this positive overall picture, there are a number of areas where further work could be undertaken.
It is alarming that two of the UK's major banks were simply unable to provide sufficient data to assure the Treasury that their assets were not linked to fraud or other criminal activity. It raises questions on the management controls within the banks and the quality of audit provided to the banks. The lack of certainty on the nature of the assets put the Treasury in a difficult position and the Accounting Officer had to ask for a Direction from Ministers before proceeding with the Scheme. While mortgage lending targets have been met, first year lending targets for businesses were not, despite assurances given by the banks to the Treasury. In part this was because many businesses chose to repay existing borrowers. But subsequent research has indicated that tight credit supply is likely to have been the dominant influence on the level of lending in the economy. With few mechanisms through the Scheme to encourage banks to help credit-worthy businesses in need of finance, the Treasury needs to develop other means of influencing banks' behaviour. Simply changing the lending targets from a net to a gross basis risks reducing the pressure on the supported banks to increase credit.
The prospect of the Treasury having to bail out RBS under the Scheme has receded, but there is a small risk that any future recession may change this. The Treasury now needs to make sure that it retains the knowledge and experience it has built up over the past three years so that it can act to protect the taxpayer if interventions to support UK banks are needed in the future.
On the basis of a report from the Comptroller and Auditor General we took evidence from the Treasury, and separately from RBS and Lloyds, on the maintenance of financial stability and protection of the taxpayer.