Brown Says Doubling Bank Bailout Will Save UK Taxpayers Money
Nov. 3 (Bloomberg) -- Prime Minister Gordon Brown hailed adoubling of the bailout for the two largest British banks,saying the move will reduce the liabilities shouldered bytaxpayers by as much as 300 billion pounds ($488 billion).
The Treasury will inject 31.2 billion pounds into RoyalBank of Scotland Group Plc and Lloyds Banking Group Plc,allowing the two institutions to scale back their dependence ongovernment guarantees for their most toxic assets. It alsopledged up to 8 billion pounds for Edinburgh-based RBS to use“in exceptional circumstances.” To fund the injection, theTreasury may have to borrow an extra 13 billion pounds.
“We have been able to reduce the liability we have frominsurance of some of the major banks in this country, and thereis going to be a benefit to the taxpayer as a result of that,”Brown said at a press conference in London today. “At the endof the day, banks will be paying money to the British public,not the other way round.”
Brown’s Labour government is seeking to claim credit forsaving the financial system after the credit crisis triggeredthe first run on a U.K. institution in more than a century andforced the Treasury to take control of four banks. Last year,the government rescued RBS and Lloyds with 37 billion pounds ofpublic money.
With an election no more than seven months away, Brown’spopularity has dwindled as the costs of the recession and thebank bailout put the public finances under their biggest strainsince World War II. The Conservative opposition said today’smeasures may not help the economy.
‘Elephant in the Room’
“Let’s not miss the elephant in the room,” said GeorgeOsborne, the Conservative lawmaker who speaks on finance. “Thegovernment is having to put another 39.2 billion pounds oftaxpayer’s money into the banks, a bigger bailout than theoriginal bailout last autumn. There is no guarantee that it willget credit flowing.”
The Liberal Democrats said today’s move would allow thebanks to wiggle out of agreements to increase lending toconsumers and businesses, an assertion the Treasury denied.Ministers said RBS and Lloyds will be prevented from payingdiscretionary cash bonuses this year to staff earning more than39,000 pounds.
“The bonus agreements in both banks are a sham” andgovernment claims that the bailout will save taxpayer money are“simply not true, said Vince Cable, a Liberal Democrat lawmakerwho speaks on finance. “Until we can split up the banks in ameaningful way, so that taxpayers will not be forced tounderwrite casino activities, all banks should pay a premium forthe explicit support they receive.”
Treasury’s Response
Chancellor of the Exchequer Alistair Darling said today’sagreements will spur competition in the banking industry byforcing both Lloyds and RBS to sell parts of their businessesaccounting for about 10 percent of British retail banking. That,he said, will open the door to new banks to start up in the U.K.
“I would like to see perhaps three new entrants comingonto the high street,” Darling said on BBC Radio 4’s “Today”program. “We do need to be rigorous about competition. If youdon’t you do find it hard to get credit and you do find it hardto get loans at the right price.”
Under the terms of the agreement with RBS, the bank nowwill bear the costs of the first 60 billion pounds of any lossesinstead of 42 billion pounds it agreed to earlier this year. Inexchange, the Treasury will allow RBS to take advantage of taxallowances worth up to 11 billion pounds that the bankoriginally had agreed to surrender to win Treasury protection.
Government Stakes
The Treasury will inject 25.5 billion pounds of capitalinto RBS, increasing its stake to 84.4 percent from 70.3percent. It will maintain its 43 percent holding in Lloyds bypaying 5.7 billion pounds for new shares being offered toexisting stockholders.
Those purchases of shares will, all else being equal, add13 billion pounds to the 220.8 billion pounds of centralgovernment cash borrowing forecast in the April budget, theTreasury said. There will be no impact on public-sector netborrowing, the government’s preferred measure, a spokesman said.
Lloyds will escape the Treasury program to insure 260billion pounds of its assets, reducing a fee of more than 15billion pounds to 2.5 billion pounds. RBS’s insured assets willdrop by 43 billion pounds to 282 billion pounds.
By reducing the size of the Treasury’s umbrella protectingthe two banks, taxpayers will shoulder smaller risks. So far,Darling has extended about 1.4 trillion pounds of support forthe economy and financial institutions.
In April, the Treasury estimated potential losses on itssupport for the financial system at between 20 billion poundsand 50 billion pounds, or as much as 3.5 percent of nationalincome. Today, Darling said he’d reduce that estimate in hispre-budget report, due within six weeks.
“What we’ve got here is better structured, a better dealfor the taxpayer,” Darling said on BBC radio. “That doesrepresent a major step forward.”
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To contact the reporter on this story:Reed Landberg in London at landberg@bloomberg.net.
Last Updated: November 3, 2009 07:57 ESTSource: Bloomberg
