Financial Stability Measures for Lloyds Banking Group and Royal Bank of Scotland
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Issued 03 November 2009
Implementation of Financial Stability Measures for Lloyds Banking Group and
Royal Bank of Scotland
The Government is today announcing the conclusion of discussions with Lloyds
Banking Group (Lloyds) and Royal Bank of Scotland (RBS) regarding their
participation in the Government’s Asset Protection Scheme (APS).
As a result of improved market conditions and following extensive due
diligence announced in February, the Government can today announce that:
- Lloyds will not participate in the APS and instead will raise additional
private sector capital and pay a fee to the taxpayer for the implicit
protection provided to date. This will reduce the risk borne by the taxpayer,
improving value for money;
- RBS will participate in the APS under revised terms that improve
incentives and deliver better risk-sharing with the private sector.
The likely costs to the taxpayer and the risks on the impact on the public
finances have been reduced. Both banks will still be required to meet tough
conditions on pay and lending set out below.
To promote greater competition in UK banking, and meet EU State Aid rules,
the banks will also be required to make divestments of significant parts of
their businesses over the next four years.
The APS was announced in January to remove uncertainty about the value of
banks’ past investments and allow banks to rebuild and restructure their
operations to increase lending in the economy. All major UK banks were eligible
At the time the world’s financial system was facing a worsening crisis of
confidence about the underlying value of bank assets. This was undermining
financial stability and preventing the UK banking system from providing loans
In-Principle Agreements with Lloyds and RBS
RBS and Lloyds agreed in principle in February and March respectively to
participate in the APS and in return to pay a fee to the taxpayer. They also
entered into legally binding commitments to increase lending in the economy.
At the time the APS was announced, both RBS and Lloyds had insufficient
capital to withstand the downside risks to their balance sheets. They were
unable to raise this capital through the private sector, and needed to call on
the capital protection afforded by the APS.
These agreements have given both banks implicit protection for their balance
sheets, allowing them to begin the process of rebuilding and restructuring the
healthier core of their businesses and to increase lending.
As announced at the time, final agreements with both banks would be subject
- HM Treasury undertaking a thorough due diligence of the assets that RBS
and Lloyds proposed to put into the APS;
- Ensuring the terms were consistent with EU State aid requirements;
- Rigorous stress-testing on both banks by the FSA, in line with the
stress-testing framework it announced in May.
Together, these steps have given greater clarity about the scale and timing
of likely losses and the impact those could have on Lloyds and RBS.
Following the completion of negotiations with the banks, the Government is
now reporting to Parliament at the earliest opportunity the revised terms of
agreement with RBS, and its decision with respect to Lloyds’ exit from the
Improved market conditions
Since the APS was announced, market conditions have improved markedly –
largely as a result of the action the Government has taken, both domestically
and globally in coordination with our partners in the G20 and European Union.
The announcement of the APS has helped to restore confidence in the banking
system and banks are now able to secure capital support from the private sector
in a way that was not possible six months ago.
Lloyds Banking Group
Under the March APS agreement with Lloyds, the Government would have been
called on to cover 90% of losses for the £260 billion in assets covered under
the scheme after the first loss had been exceeded. Today’s agreement removes
this significant contingent liability to the taxpayer.
As a result of the confidence provided by the APS, and improved market
conditions, Lloyds can now raise sufficient capital through the market to meet
the FSA’s capital requirements without the need for additional support from the
Lloyds has announced plans to raise £21bn through a combination of a £13.5bn
rights issue, and £7.5bn by swapping existing debt for contingent capital. This
option represents better value for money for taxpayers, as the private sector
will now provide the majority of the capital required to protect Lloyds from the
downside risks to its balance sheet.
Lloyds will also pay the Government a fee of £2.5bn in return for the
implicit protection already provided by the taxpayer since the announcement
earlier in the year. The Government will take up its rights as a shareholder in
Lloyds to participate in the planned capital raising, investing £5.7bn net of an
This will see the Government’s shareholding in Lloyds remain at 43% and
therefore maintain the return for the taxpayer when the Government’s shares are
The Government’s final agreement with RBS on its participation in the APS
reflects the due diligence it has undertaken, FSA stress tests and the
requirements of the European Commission’s State Aid guidelines. All material
commercial issues have now been agreed with RBS. Full legal documents are being
finalised and will be signed shortly. These arrangements remain subject to
final approvals, including by the European Commission.
The final agreement involves:
- A larger first loss to RBS than agreed in February – the first loss to be
borne by RBS has increased from £42bn to £60bn;
- A smaller pool of insured assets – reduced from £325bn to £282bn based on
their balance sheet at end 2008;
- A capital injection by the Government of £25.5bn –– equal to the £25.5bn
total capital commitment announced in February, which comprised £13bn in
upfront capital, £6bn of capital to be drawn at the option of RBS and £6.5bn
in a fee taken as capital;
- A fee to the Government to be paid annually at £0.7bn for the first three
years, followed by £0.5bn a year for the life of the scheme – compared to the
up-front fee of £6.5bn paid in shares agreed in February;
- Removing the undertaking, agreed by RBS in February, to forego for up to
five years certain tax losses and allowances. This was estimated at a value of
£9-11bn in RBS’ most recent accounts.
As a result the Government’s economic interest in RBS will rise to 84%,
consistent with the agreement in February, but the Government’s ordinary
shareholding will not exceed 75%.
To reflect the £18 billion increase in the first-loss borne by the company,
the Government will no longer require RBS to give up its tax losses and
allowances. And to protect against a worst-case scenario the Government will
provide a contingent capital commitment of up to £8 billion. This would be drawn
down in two tranches and only in exceptional circumstances where RBS’s Core Tier
1 capital ratio fell below 5%. In return RBS will pay a fee of 4% a year for the
contingent capital. The FSA has confirmed that, with these measures, RBS
complies with its stress testing framework.
The Government has also agreed that RBS will pay a minimum exit fee when it
leaves the APS. The minimum fee will be the largest of either:
- £2.5bn, or
- 10% of the actual regulatory capital relief received by RBS while it was
in the APS
This fee will be less any fees already paid. Exit would need to be approved
by the FSA.
Additional Commitments by the Banks
The Government’s priority in its negotiations with both banks has been to
support financial stability, provide value for money for the taxpayer and ensure
that the benefits of healthier banks translate into increased lending in the
In return for taxpayer support provided, both banks have agreed:
- That existing commitments to increase lending to businesses and homeowners
by a total of £39bn for both banks will remain in place;
- A commitment to ensure charging for current accounts and overdrafts is
transparent and fair and that customers are not overcharged;
- A ‘Customer Charter’ for lending to small and medium enterprises to
reinforce their commitment to meeting all reasonable applications for finance
from viable businesses;
- Not to pay discretionary cash bonuses in relation to 2009 performance to
any staff earning above £39,000;
- In addition executive members of both boards have agreed to defer all
bonuses payments due for 2009 until 2012, to ensure that their remuneration is
better aligned with the long-term performance of their banks;
- These build on their existing commitments to implement the G20
remuneration principles, the FSA Remuneration Code and any relevant provisions
accepted by the Government from the Walker Review.
The Government has reached agreement in principle with Commissioner Kroes
after constructive and helpful discussions on a package of restructuring and
other measures, which we are confident will address the concerns of the European
Commission. The package is now subject to agreement by the College of
To promote greater competition in the UK banking sector, and as part of the
State aid requirements of the European Commission, the Government has agreed
restructuring plans for RBS and Lloyds that include the divestment of a
significant proportion of their retail and corporate banking assets over the
next four years.
To ensure these divestments increase diversity and competition in the UK
banking market, the assets can only be sold to small or new players in the
market. The divestments from each bank will represent a viable stand-alone
entity, together representing nearly 10% of the UK retail banking market.
Reduced risks to the taxpayer
As a result of all of these factors, the likely costs to the taxpayer and the
risks on the impact on the public finances have been markedly reduced:
- The total contingent liabilities the public finances are exposed to have
reduced by over £300bn as a result of Lloyds not participating and RBS
reducing the value of assets covered by the scheme.
- The remaining risks are better shared with private sector shareholders –
for Lloyds, the private sector will provide £15bn of capital and for RBS, the
first loss on the remaining £282bn of contingent liabilities has increased to
- The Government estimated in the Budget that the impact of the financial
sector interventions would be between £20-50bn and prudently included £50bn in
the public finance projections. We expect, subject to wider factors, to revise
these figures downwards in the Pre-Budget report, alongside the Government's
fiscal and economic forecasts.
- However, the purchase of shares would, all other factors being held
constant, increase the central government net cash requirement (CGNCR) for
2009-10 by around £13 billion relative to that announced at Budget 2009. The
CGNCR for 2009/10 will be updated in the Pre-Budget Report, to account for all
changes since the Budget including, for example, the net receipt from the
redemption of Lloyds preference shares in June 2009.
Next steps and Timetable for Reporting
The Government has reached agreement on the substantive elements of the deals
with both Lloyds and RBS and is now announcing these at the earliest possible
Full legal documentation on RBS’ participation in the APS is being finalised
following this agreement and will be published shortly. Lloyds has signed an
exit agreement and this has been provided to Parliament separately today.
Following European Commission approval, which we expect over the next few
weeks, the Government will publish:
- Comprehensive details of the agreements
- Detailed scheme rules
- Further information on the assets
In the future, the Government will continue to report to Parliament on the
- Reporting to Parliament in the Budget and PBR
- Publication of audited annual accounts by HM Treasury and the Asset
Protection Agency (APA) on the performance of assets in the scheme
- Auditing of the APA by the NAO
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Article Published/Sorted/Amended on Scopulus 2009-11-03 11:08:29 in Economic Articles