Bailed-out banks to be monitored
Chancellor Alistair Darling has unveiled plans to launch a new body to oversee taxpayers’ shares in the three banks his government was forced to bail-out last month.
Speaking at a Treasury Select Committee meeting yesterday, Darling announced that the new watchdog, called UK Financial Investments (UKFI), will protect the interests of taxpayers whose money the government invested in the banks as part of its £37 billion recapitalisation plan.
The bail-out saw the Royal Bank of Scotland (RBS) given an £20 billion injection, while Lloyds TSB and HBOS collectively received £17 billion. As a result, taxpayers are expected to own about 60% of RBS and 40% of Lloyds TSB and HBOS once the two banks merge.
Darling said: “The company, which is wholly owned by the government, sets its overarching objectives as to protect and create value for the taxpayer as shareholder, with due regard to financial stability and acting in a way that promotes competition.”
But creating value will be difficult, as the three banks concerned continue to post losses due to the ongoing credit crunch.
RBS has revealed that it was forced to write off a further £206 million in the third quarter of this year from loans linked to toxic sub-prime debts – on top of the £5.9 billion in the first half of 2008.
The bank also added that slowing economic growth and the ongoing credit crunch would 'adversely affect' its results this year.
Yesterday HBOS revealed it has lost around £5.2 billion since the start of the year - an increase of £2.5 billion since June 2008. Lloyds TSB was also been forced to write off £270 million on assets linked to sub-prime debts in the third quarter of the year.
The new agency is to be run at ‘arms-length’ from the government, with Sir Philip Hampton, chairman of Sainsbury’s and former finance director of Lloyds TSB to take the role of the chairman. Senior Treasury official John Kingman will be chief executive.
The chancellor also expects the UKFI to supervise taxpayers’ money in Northern Rock and Bradford & Bingley in the future.
But consumer champion Which? says the government needs to go further in protecting taxpayers and consumers by completing reforming the banking sector.
In a letter to Rt Hon Alistair Darling MP, Which? says the government must force the three banks that have received taxpayers' money to immediately pass on interest rate cuts to customers. Read more in our article: Banks may refuse to cut mortgage rates.
It also calls for an independent review of banking to implement and says consumers' interests must be put at the heart of the industry.
Peter Vicary-Smith, chief executive of Which?, says: "The banks have had their bail-out: now it's time for them to deal sympathetically and fairly with the plight of ordinary consumers, many of whom are anxious about their savings or struggling with their mortgage. It is the government's duty, as a major shareholder, to ensure this happens.”
UK Financial Investments
The UKFI was established on 3 December 2008 to manage the government’s investments in financial institutions, including the Royal Bank of Scotland (RBS), Lloyds TSB/Halifax Bank of Scotland (Lloyds Banking Group), Northern Rock and Bradford & Bingley. The aim of UKFI is to protect the UK taxpayers’ investment in these companies and to help the companies “create value” so the government’s shares in these companies can be gradually sold back into the market at a profit. As an idea to how big an exposure the UK taxpayer has, if the government’s stake in these banks falls 1%, this is equivalent to the annual defence budget of £37bn and a 3% fall is the NHS budget of £110bn.
All sub-prime financial products are aimed at borrowers with patchy credit histories and the term typically refers to mortgage candidates, though any form of credit offered to people who have had problems with debt repayment is classed as sub-prime. Depending on the lender’s own criteria, sub-prime can apply to borrowers who have missed a few credit card or loan repayments to people who have major debt problems and county court judgments (CCJ) against their name. To reflect the extra risk in lending to people who have struggled in the past, rates on sub-prime deals are typically higher than for “prime” borrowers.