HM Treasury

Newsroom & speeches

03 November 2009

Statement on banking reform

Check against delivery

Mr Speaker, with permission, I would like to make a statement on the banks in which we have shareholdings.

This morning, the Treasury, Lloyds and RBS issued market notices in the usual way.

Mr Speaker, in October last year, I set out a range of measures designed to prevent the collapse of the banking sector.

Those measures are working, and countries across the world took very similar steps over the following few weeks.

But the uncertainty in global financial markets had a very serious impact on confidence, resulting in a world recession.

This, in turn, worsened the outlook for our economy, leading to higher losses for UK banks.

It was clear further action was needed to strengthen the banks – and in January we announced an Asset Protection Scheme, to prevent a further shock to confidence and ensure lending could continue. 

We continued to support the economy through fiscal and monetary policy, and co-ordinated a global policy response at the London Summit in April.

Those measures are working too – fears of a global depression have receded and market confidence has started to return. 

As a result we are now able to achieve our objectives on financial stability and banking reform at a lower overall cost to the taxpayer.

Mr Speaker, the Asset Protection Scheme I announced in January has played a vital role in supporting confidence in financial markets. 

Let me remind the House of the key features which I set out then. 

It provided insurance against losses arising on a pool of bank assets, and in return the banks paid a fee in the form of shares. 

The effect of the scheme is to strengthen the capital position of any bank in the Scheme – but, of course, this carries a risk of exposure for the taxpayer. 

The Scheme was open to all major UK banks. 

In the event, improved market conditions meant that only two banks decided to participate. 

Since then, further improvement in market conditions means Lloyds have been able to develop a better plan.

They now don’t need to participate in the Scheme – and this will significantly reduce the cost and exposure for the taxpayer.

Mr Speaker, I will now explain in detail our proposals to better restructure the banks and make them stronger.

Turning first to Lloyds.

Following the recapitalisation last October, the Government owned 43 per cent of the bank.

In March, we reached an agreement in principle with Lloyds on their participation in the Scheme. 

This would have increased, through the fee, their capital by over £15bn, increasing the cost to Government and increasing our stake in Lloyds to 62 per cent. 

And we agreed then in principle to insure £260bn of assets, giving us a very large contingent liability.

But now that market conditions have improved, we’ve agreed a better proposal for Lloyds, to bring in substantial private capital and reduce taxpayer exposure.

So Lloyds have announced today they will raise £21bn in the open market.

This capital raising is fully underwritten by commercial banks.

As a shareholder, the Government has the option to take-up part of the newly-issued equity.

If we did not do so, the value of the existing taxpayer shareholding would be diminished.

So to protect the value of our shares, we have decided to take-up our share of this new capital, investing £5.7bn net of an underwriting fee.

By raising capital in the markets, Lloyds will begin its transition from state support to private finance, and no longer need the insurance of the Asset Protection Scheme.

Because Lloyds have benefited from the existence of the Scheme since March, they have agreed to pay the Treasury a fee of £2.5bn and to reimburse our costs.

Mr Speaker, today’s decisions make Lloyds a stronger bank and provide better value for the taxpayer:

Mr Speaker, I now turn to the Royal Bank of Scotland.

It is a bigger bank than Lloyds, with a more complex balance sheet, and greater exposure to losses, mainly due to their purchase of the Dutch investment bank ABN Amro.

Under February’s agreement in principle, the Government would insure £325bn of assets through the Asset Protection Scheme, as well as providing:

Together, this would have increased RBS's capital by £25.5bn, taking the Government stake to 84 per cent. 

Mr Speaker, before we could reach a binding agreement, we needed to:

Carry out due diligence on the assets;

And ensure the final terms were consistent with emerging European Commission guidelines. 

The restructuring guidelines were published in July, following extensive work with the UK and other countries.

We and the FSA have now also completed due diligence work on the RBS balance sheet.

As a result, we are making a number of changes to the terms of the scheme, which will improve incentives and better share risks with the private sector. 

Mr Speaker, while market conditions have improved, RBS still needs to do more to be able to stand on its own feet.

So we will continue with our plan to invest £25.5bn of capital into RBS.

But there are three key changes.

First, there will be a £43bn reduction in the pool of assets covered by the insurance scheme – reducing the Government’s contingent liability.

Second, the first loss on these assets – payable by RBS – will be increased from £42bn to £60bn – further protecting the taxpayer.

Third, in return, RBS will pay an annual fee of £700m for the next three years and £500m per year thereafter, giving them an incentive to leave the scheme as conditions improve.

And when they do leave the APS, they must have paid a minimum fee of £2.5bn or 10 per cent of the actual capital relief received.

To reflect the increase in the first loss, amounting to £18bn more payable by RBS, we will no longer require RBS to give up its tax losses, which they estimate at between £9-11bn.

And in the unlikely event of a severe downturn, it may be necessary to provide up to £8bn contingent capital.

But this will only be triggered if there is severe stress, taking their core capital ratio to below 5 per cent.

Again, in return for this, RBS will pay an annual fee of £320m for as long as the contingent capital is available.

Mr Speaker, in the case of RBS, the overall level of Government support will remain broadly the same as announced in February.

But this revised deal is better structured, with better risk sharing and greater incentives to exit:

And I will provide the House with full details of the operation of the scheme when the final agreement is signed and approved by the Commission.

Mr Speaker, as part of these restructured deals, we are pushing forward with reform at these banks – with improved lending and remuneration policies.

Both Lloyds and RBS will be in a stronger position to continue lending.

Lloyds will increase lending capacity this year and next – with an additional £11bn for businesses and £3bn for homebuyers in each year.

RBS will continue to meet their lending commitments of £25bn this year and next.

And both will publish customer charters on good practice on SME lending – increasing transparency and improving loan conditions for business customers.

Mr Speaker, on pay, all major retail and investment banks in the UK need to meet the G20 principles and FSA rules, so that bonuses have to be:

For this year, there will be no discretionary cash bonuses, except for staff earning less than £39,000 a year.

And, in addition, the executive boards of both banks will have their bonuses deferred in full until 2012.

This goes much further than the G20 agreement and further than any other banks in the world.

Mr Speaker, I will continue to strengthen the supervisory regime, building on my proposals in July, by:

Mr Speaker, I believe these steps are better for the taxpayer, better for the banks and better for the economy.

As a result, the likely cost to the taxpayer and the risks faced by the public finances have reduced markedly.

The total assets protected have reduced by over £300bn, there is more private sector investment, and the fees received are better structured.

And I expect, subject to wider factors, to revise downwards the provision for financial sector interventions at the Pre-Budget Report.

Mr Speaker, as I said in my statement in July, our second objective is to encourage greater banking competition, in the high street and for small and medium businesses.

Since the financial turmoil started in 2007, the banking industry has become more concentrated in most advanced economies.

But over the course of this year, we have been working with the Commission to agree on how to restructure the banks while meeting State Aid rules.

For Northern Rock, I have already set out my intention to split the bank into two separate companies – and we now have Commission approval for this.

This will mean less capital support is needed to keep Northern Rock lending – and when the time is right, it will facilitate a return to the private sector.

Lloyds will sell Cheltenham and Gloucester, the Intelligent Finance internet bank, the TSB brand, Lloyds TSB Scotland, and some Lloyds TSB branches in England and Wales.

Altogether over 600 branches by 2013.

RBS plan to sell their insurance businesses – including Direct Line and Churchill – as well as its commodity trading arm and its card payment processing operation.

It will also divest over 300 branches across the UK by 2013.

Together, these businesses could potentially amount to about 10 per cent of the retail banking market in the UK.

And, Mr Speaker, in each and every case, we will insist these institutions should not be sold to any of the existing big players in the UK banking industry.

So Lloyds and RBS will each be required to sell their retail and SME businesses, as a single viable package, to a smaller competitor or new entrant to the market.

And this, together with Northern Rock, will potentially create three new banks on our high-street in the space of five years.

This will increase diversity and competition in the banking sector – giving customers more choice and better service.

Mr Speaker, the financial services sector will remain an important part of our economy.

Yesterday’s job losses, announced by RBS, are a reminder that for many employees these are very difficult times.

We will do everything we can to work with the banks to help find new jobs for those affected.

Mr Speaker, I believe my proposals today will ensure we have a strong and vibrant financial services sector in the future.

They will mean stronger and safer banks better able to support the recovery.

And more competition and more choice for the people who use them.

And I commend this statement to the House.

Ends

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