Northern Rock bailout to cost UK taxpayers billions

UK taxpayers' are expected to lose billions of pounds in the bailout of Northern Rock, Lloyds and RBS, report for the Commons Committee of Public Accounts says

by Natalie Glanvill on 16 November 2012 10:03


The HM Treasury’s decision to rescue Northern Rock back in 2008 is expected to cost the UK taxpayer £2bn, the parliamentary Committee of Public Accounts has said.

The influential group of MPs warned today that the chances of the Treasury recovering all of the taxpayers money is slim and that “even if the Treasury’s predictions are correct, there will still be an economic loss, currently estimated at £2 billion, to the taxpayer”.

Despite the announcement today that the nationalisation of Northern Rock has potentially cost UK tax-payers £2bn, the report also suggests that “the £66 billion cash spent purchasing shares in RBS and Lloyds may never be recovered” meaning taxpayers will be further out of pocket.

It looks as though UK taxpayers could be stuck with the banks for much longer than previously anticipated as the sale of stakes in the banks for the price the government paid will not appear to take place “any time soon”.  The MPs involved in this report are not confident, given the low level of competition and huge investment, that the UK taxpayer will make a profit on the eventual sale of two of Britain’s larger banks, Lloyds and RBS.

Labour MP and Chair of the Committee, Margaret Hodge said, “The lack of competition does not fill us with confidence that the taxpayer will make a profit on the sale of the two banks which remain in private ownership, RBS and Lloyds. There is a risk that the £66 billion invested in RBS and Lloyds may never be recovered”.

The Treasury accepted its part in a “monumental collective failure” to understand and respond to the banking crisis, the spending watchdog for Parliament said today.

According to the report, it took the Treasury five months to realise that a private sector buyer for Northern Rock could not be found and as a result of the delay in deciding with what to do with the bank in crisis, a financial loss on the intervention was inevitable.

As a result of the mortgage crisis that hit Britain in 2008, the UK Government made the decision to intervene and save Northern Rock, which resulted in the bank being split up into two parts (assets and retail). The Treasury’s idea was to run-down the majority of the mortgage assets in a separate public sector vehicle – Northern Rock Asset Management (NRAM) plc. and sell the new retail bank (before 2013).

The Treasury’s failure to understand and respond to the banking crisis led to the establishment of the UK Financial Investments (UKFI). Responsible for managing taxpayer’s shares in banks, UKFI took over Northern Rock plc. shares in 2010 but the retail bank still reported a loss in 2011.

Northern Rock plc was sold to Virgin Money in 2011 for proceeds currently estimated at £931 million, an expected loss of £469 million.

Hodge said that taxpayers, “still lost nearly half a billion pound” on the sale of Northern Rock plc.

The Treasury is uncertain whether it will ever fully regain the public funds which were provided to Northern Rock as it “relies on the profitable wind-down of NRAM plc. to offset the loss on the sale of Northern Rock plc.”.

Natalie Glanvill is an Editorial Assistant at The Commentator and tweets at @NatalieGlanvil1

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