|
In 2007, following a period of instability in the financial markets, the Treasury intervened to protect depositors and stop instability spreading. This included nationalisation and lending to troubled institutions and to the Financial Services Compensation Scheme, the purchase of a large number of shares in RBS and Lloyds, establishing sector-wide schemes to guarantee banks' debt-funding and protect their assets, and indemnifying the Bank of England against losses for providing temporary liquidity.
This was justified at the time to protect taxpayers, but the peak of the financial crisis has passed, and banks must not remain dependent on taxpayer support indefinitely. Although the level of explicit support has decreased from nearly £1 trillion to £512 billion, the Treasury still retains the ultimate risk of supporting banks should they threaten the stability of the overall financial system. The options available to deal with a failing bank are still not able to pass the costs of failure to the shareholders and creditors instead of to the public purse.
Taxpayer support for the banks, both explicit and implicit, provides a subsidy to the banking sector as a whole. Estimates of the size of the implicit subsidy vary - from as high as £100 billion to just below £10 billion in 2009 alone. But regardless of the size, the Bank of England, Treasury, and RBS all agreed the implicit subsidy needed to be removed. The explicit subsidy includes the fees paid by banks for their use of the Credit Guarantee Scheme which, to date, have been at least £1 billion less than the benefit received by the banks. These subsidies enable private gains to be made at the expense of public risk. Contracts entered into when state support was put in place have allowed some of these gains to be used to pay bonuses to certain bank staff, and dividends to shareholders, rather than enhancing the financial sustainability of the sector.
Although the banks' progress to date on reducing their reliance on the explicit taxpayer support is encouraging, the Treasury must continue to encourage the banks to manage the transition from reliance on the support schemes to private funding in an orderly and smooth way.
Whether or not the taxpayer obtains value for money from exiting from the support depends heavily on a successful sale of the shares in RBS and Lloyds. The value of the shares at the time we took evidence was still some £8.4 billion below the price paid by the taxpayer. The scale of the government shareholding is far greater than in previous share sales and will require extraordinarily careful handling. When developing its strategy for the sale, the Treasury will need to balance the legitimate desire to maximise proceeds against its other objectives of preserving financial stability and enhancing competition. Considerable regulatory and political uncertainty over the Government's intentions for the banking sector will remain until the Government has responded to the recommendations from the Independent Commission on Banking, expected to report in September 2011.
On the basis of a report from the Comptroller and Auditor General,[1] we took evidence from the Treasury, the Bank of England, and separately from RBS and Lloyds, on the progress on repaying the taxpayer support and maintenance of financial stability. We are grateful to the Bank of England for its evidence at the first hearing, and we hope the Bank's senior officials will be able to support the Committee's future hearings on this and related subjects.
| 
