Conclusions and recommendations |
1. In challenging circumstances, the Treasury
achieved its overriding aim to maintain financial stability.
By avoiding the huge economic and social consequences of the failure
of a major bank, the Asset Protection Scheme (the Scheme) was
an important part of a wider package of measures to support the
UK's financial system.
2. The Treasury conducted extensive investigations
of the assets put forward for inclusion in the Scheme, but both
banks encountered major difficulties in providing all the data
requested. Two of the UK's major banks
could not provide basic information on their assets and sufficient
assurance that their assets were not linked to fraud or other
criminal activity. As the Treasury did not have a complete picture
of the risks the taxpayer would be taking on, it was put in a
difficult position and the Accounting Officer had to ask for a
Direction from Ministers before proceeding with the Scheme. The
Treasury should take steps to ensure the banks address these gross
deficiencies in basic data and, when considering the future role
of financial services regulators, make sure that arrangements
are in place to test whether this has been done.
3. The gaps in information on the banks' assets
also begs questions about the role played by the auditors of banks
ahead of 2008, when the full impact of the financial crisis became
apparent. The Treasury and the Department
for Business, Innovation and Skills have been working with organisations
in the banking sector to improve the audit framework. They should
now expand discussions to include the major professional audit
and accountancy bodies. The Treasury should report back to us
within a year on specific actions to ensure that professional
audit standards and practices are up to the task of providing
robust assurance on the internal control and governance of financial
institutions, and on the valuation of assets.
4. The Treasury lacked effective sanctions
against RBS and Lloyds when they failed to meet their lending
targets. In the first year, the mortgage
lending targets were met but lending to businesses fell short
of the targets by £30 billion. Under the lending commitment
the Treasury considered a range of sanctions against RBS and Lloyds,
should the second year target be missed, but decided that each
sanction had a downside that outweighed the benefits. This is
not satisfactory, and the Treasury should consider the precise
mechanisms by which it will exert influence, including assessing
progress and the application of appropriate sanctions. In giving
the lending commitment, the banks wanted to highlight the constraints
of demand and risk. Nevertheless there appears to be a reduction
in the supply of credit, and we expect the lending commitment
to be met, and a determination to achieve it to be shown by the
5. There were gaps in the Treasury's analysis
of how much RBS should pay for the Scheme.
The Treasury accepted that more could have been done to analyse
the range of possible fees. However, the Treasury considered that
such an analysis would not have resulted in a higher fee as that
could have risked the viability of the scheme in providing assurance
to the financial markets. Given the huge sums at stake, however,
it remains unsatisfactory that a comprehensive analysis was not
undertaken and we expect to see such analyses in the future where
there is a significant exposure to the taxpayer.
6. Following the announcement of the Scheme
in January 2009, the Treasury retained flexibility to make changes
and revisited earlier decisions to check whether they still provided
value for money. Just ahead of signing
the deal in November 2009, the Treasury reconsidered its options
in the light of market changes, but considered that the Scheme
remained the best way to ensure financial stability. Lloyds was
allowed to leave the Scheme and raise capital in the markets and
the terms of RBS's participation were recast. Reviewing decisions
in the context of changing circumstances was good practice and
the Treasury should ensure its guidance to departments requires
this in all cases.
7. While the prospect of the Treasury making
payments to RBS has receded since 2009, there remains a risk that
a further and severe economic downturn might result in RBS remaining
in the Scheme for the foreseeable future.
Such an outcome would lead to significant and long-term costs
for the taxpayer. The Treasury, through the Asset Protection Agency,
must make sure that RBS properly prioritises and complies with
the requirements of the Scheme to maximise the returns on the
insured assets in the interests of the taxpayer, its largest shareholder.
The interests of the taxpayer must not in any way be sacrificed
for the interests of the bank.
8. The Treasury took the lead role in developing
the Scheme and has accumulated valuable knowledge and experience
in doing so. When Northern Rock got into
difficulty in 2007 and had to be nationalised, the Treasury was
severely stretched in terms of resources and experience but its
capacity and capability have since grown. Current changes in the
regulatory landscape mean that much of the day to day management
of any future banking crisis will fall to the Bank of England.
The involvement of public funds will, however, require the Treasury's
prior approval. The Treasury will therefore need to make sure
that in reducing its staffing it retains sufficient capability
to understand and challenge proposed interventions should its
approval be sought in the future.