HM Treasury: The Asset Protection Scheme - Public Accounts Committee Contents

1  Maintaining financial stability

1.  Although a degree of stability had been achieved following the initial purchases of shares in RBS and Lloyds in October 2008, market confidence remained weak. By early January 2009, the Treasury had become increasingly concerned about growing risks to financial stability. Its announcement of the Asset Protection Scheme (the Scheme) later that month, along with further purchases of shares in both banks, had a beneficial impact on the financial markets, helping the Treasury to achieve its overriding aim of maintaining financial stability.[2]

2.  In the period between the Scheme's announcement and its implementation in November 2009, the Treasury conducted intensive work to analyse and understand the assets that might be covered. The Treasury needed assurance on the existence and terms of the assets (for instance, who the debtor was and the banks' rights in the event of a default). Both banks, however, encountered major difficulties providing the Treasury with data on their assets. Over a number of years, RBS had expanded its balance sheet through acquisitions, including the purchase of ABN AMRO in September 2007. The bank attributed the delay in submitting data to this acquisition strategy which had left the bank with over 20 different IT systems in operation across the group. As such, its systems had not been designed to provide data in the form required by the Treasury.[3] However it should have held the information for its own purposes and interests.

3.  Because of the poor state of the IT systems at RBS the Treasury could not be sure that the assets were not tainted in terms of their underpinning legality. Given the level of uncertainty the Treasury's Accounting Officer felt that he needed a direction from Ministers to proceed. RBS gave the Treasury an assurance that there was no material or systemic criminal conduct affecting the covered assets. If RBS becomes aware of any such activity, it must report this to the Treasury and the Scheme rules specify that the cover provided may then be terminated. RBS reported that, thus far, there had been no material instances which threatened the taxpayers' position.[4]

4.  The difficulties encountered by the Treasury in obtaining the necessary data raise questions about the internal management of the banks, and the audit and regulation of the banks prior to the crisis. RBS acknowledged that a lot of things had not been done well prior to the crisis, including keeping good books and records, and that significant effort had since been made to address this. The Treasury acknowledged that important lessons could be drawn from the situation faced by RBS and that, until recently, its focus had been on managing the range of interventions in the banks to maintain stability. Alongside the Department for Business, Innovation and Skills, which takes the lead on standards relating to accountancy and audit, it had been working with the Bank of England, the Financial Reporting Council and the Financial Services Authority to improve the audit framework. However, it had not engaged, for example, directly with the professional accountancy bodies on the role of auditors in relation to the banks during the crisis. The Treasury accepted that it needed to be vigorous in pursuing these issues to ensure lessons were learned.[5]

5.  Both banks achieved targets for mortgage lending in the first year of operation. The target of £27 billion for net additional lending to businesses was not achieved. Lloyds provided £3 billion of additional lending against a target of £11 billion, missing its target by £8 billion. RBS received repayments that were just over £6 billion greater than its target net lending of £16 billion, missing its target by £22 billion. Together there was therefore a shortfall of £30 billion against targets for lending to businesses. The targets had been agreed with the banks as a condition of participating in the Scheme but RBS and Lloyds suggested that the targets had been agreed only at the last minute and with little thought. Even if this were true it does not diminish the responsibility of the banks to meet the agreements. The Treasury judged that the banks had missed their net lending targets for businesses because many companies had chosen to repay large amounts of existing borrowings. Larger companies had borrowed money through issuing bonds directly to investors, rather than taking loans from the banks. The Treasury considered that the failure to meet the targets had been caused by factors outside the banks' control and therefore no further action was necessary. This judgement is open to question. The Treasury acknowledged, however, that there had been a tension between its aim to see the banks lending more and the banks' desire to strengthen their capital position.[6]

6.  For the second year, the Treasury set business lending targets on a gross rather than a net basis to avoid the distortion introduced by increased repayments by businesses. The Treasury considered introducing a range of potential sanctions if the second year targets were not met, but decided that implementing any new sanctions would face insurmountable difficulties. It considered, for example, linking chief executives' remuneration more directly to the achievement of the lending targets but had decided against because of concerns it would encourage lending on non-commercial terms, regardless of whether borrowers were credit worthy.[7]

7.  Since the hearing, the Government has announced that the achievement of new lending targets from 2011 will, in part, be a more direct factor in determining the pay of bank chief executives and senior staff.[8]

2   Q 91; C&AG's Report, paras 19 and 1.7 Back

3   Qq 10, 11, 18, 19, 187; C&AG's Report, para 2.15 Back

4   Qq 3, 4, 42-44, 72, 187; C&AG's Report, para 2.15 Back

5   Qq 10-12, 31-37, 41, 187; Ev 31 Back

6   Qq 52-57, 61, 63, 124, 130; C&AG's Report, para 18 Back

7   Qq 50, 66, 92; C&AG's Report, para 3.14 Back

8   Statement to Parliament by Chancellor of the Exchequer, 9 February 2011 Back

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Prepared 20 April 2011