Taxpayers likely to break even on bank bailout, says watchdog

Nick Clark
Wednesday 15 December 2010 01:00

Britain's unprecedented bailout of the banks is unlikely to cost the taxpayer a penny, the Government's spending watchdog will say for the first time today.

The National Audit Office (NAO), which scrutinises public spending on behalf of Parliament, will say that while the bailout committed almost £1trillion of public money to the banking system, the "most likely scenario" was that taxpayers would, in the end, break even.

The assessment is in stark contrast to the Treasury's original estimate that the total cost of banking support through the Asset Protection, Special Liquidity and Credit Guarantee schemes would be up to £50bn.

Though that estimate has since been revised down, the NAO report today is the first from a Government agency predicting no loss at all.

Amyas Morse, head of the NAO, said: "We concluded in 2009 that thesupport provided to the banks was justified, but that the final cost to the taxpayer would not be known for a number of years. A year on and we have more information. The most likely scenario is that the taxpayer will not pay out on the guarantees."

The report covers the Government billions pumped in to salvage Northern Rock, Bradford & Bingley and Alliance & Leicester, as well as support to a string of other British banking groups. The scale of government support currently backing up the banks has fallen from a peak of £955bn to £512bn at the beginning of December. This has come as some of the support mechanisms have been closed to new entrants, while some of the guaranteed debts and assets in the schemes have matured and been repaid.

The report added that the cash borrowed by the state expressly to support the UK banks has risen by £7bn in the past 12 months to £124bn.

The NAO also cautioned against complacency, saying that further shocks to the banking system – such as the collapse of a UK bank – "could still lead to significant losses for the taxpayer".

While the banks seem to have come through 2010 relatively unscathed, ongoing fears over the economy and the threats associated with the sovereign debt crisis threatening to sweep Europe, optimism should be tempered, according to Mr Morse.

He said there should be a "realisation that the risk of further shocks to the financial markets and of significant loss to the taxpayer has not gone away." The watchdog added that the Treasury "will probably be paying for the support it has provided to UK banks for years to come". The support was always planned to be temporary, but as the NAO pointed out, winding the mechanisms down will be challenging. The Government "will be committed to at least some of its guarantees, loans and share investments for years".

The eventual return to the taxpayers following the Treasury's support of the high street banks will alsodepend on the price at which it sells its sizeable stakes in Royal Bank of Scotland and Lloyds Banking Group. The Government currently owns 83 per cent of RBS and 41 per cent of Lloyds. The paper loss on these positions is currently around £12.5bn.

The cost of the loans and fees to the Government related to supporting the banks is currently running at £5bn a year in interest, 11 per cent of the total interest to be paid on public sector debt between 2010 and 2011. So far this has been offset by fees and interest paid to the Treasury by the supporting banks, although the report added "these are likely to fall in future". The Government does not see this as a loss to the tax payer as they are "not direct costs".

The bail-out in numbers

955bn The total commitment in pounds made by taxpayers to the British banking system.

83 per cent The taxpayer's stake in Royal Bank of Scotland, which it may eventually be able to sell at a profit.

41 per cent The taxpayer's stake in Lloyds Banking Group, which will also be sold when market conditions are right.

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