Maintaining financial stability in the UK_ NAO work to date

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					 Maintaining financial stability in the
 UK: NAO work to date

                    Philip Airey
                   10 May 2010


HELPING THE NATION SPEND WISELY
Two reports so far, but very much
work in progress
 Northern Rock (March 2009)
 A report on wider measures (£850 billion)
  to maintain stability (December 2009)
 Further reports: asset insurance scheme
  and share sales when they take place
 Why?



HELPING THE NATION SPEND WISELY
Complex…….




HELPING THE NATION SPEND WISELY
Transparency and accountability

 Taxpayers unsure of what was done and
  why
 Accountability to UK Parliament for
  implementation of the support
 Clear message that “do-nothing” was not
  an attractive option
 But was the support provided Value for
  Money?

HELPING THE NATION SPEND WISELY
What is the £850 billion?

 Guarantees: £450 billion to ensure banks
  remained liquid
 Insurance: covering £280 billion of assets
  owned by Royal Bank of Scotland
 Share purchases: £69 billion - Royal Bank of
  Scotland and Lloyds Banking Group
 Loans: £62 billion to support banks and protect
  depositors
 Less £14 billion so far in fees and interest


HELPING THE NATION SPEND WISELY
UK Government objectives

 Stabilise the financial system
 Protect depositors’ money

 Ensure continued lending to creditworthy
  borrowers
 Protect taxpayers’ interests



HELPING THE NATION SPEND WISELY
Did they get the basics right?
 Options analysis: yes (past crises, but little time to work
  out detail, inadequate legal powers and contingency
  planning)
 Resources: few skilled staff available, heavy reliance on
  external advisers
 Timing: proportionate responses, detail worked out
  quickly after initial announcements, extensive market
  monitoring afterwards
 Performance measures: under-developed, but difficult to
  isolate effect of individual measures
 THIS WAS A CRISIS SITUATION



HELPING THE NATION SPEND WISELY
Was financial stability maintained?

 No disorderly failures of UK banks
 No losses for depositors in UK based
  banks
 Commitments in place to lend to
  creditworthy borrowers (although
  uncertainty on success so far)
 So the answer is yes, but …….


HELPING THE NATION SPEND WISELY
Market indicators inconclusive
 Solvency indicators heading in right direction
  (capital ratios up, bank shares up, CDS spreads
  down)
 Liquidity also improving (cost of wholesale
  funding down)
 But what else was affecting these indicators?
  (monetary policy, other government policies,
  action taken in other countries)
 Too complex for our report – may look again at
  a future date


HELPING THE NATION SPEND WISELY
Has the taxpayer been protected?
 So far so good
 No guarantees called and look unlikely to be called – market-
  priced fee income coming in
 Insurance – extensive due diligence and rules to manage risk
  exposure, but under-priced for policy reasons (work in progress)
 Share purchases and public ownership of smaller banks –
  extensive stress-testing to determine size of capital injections and
  linked to other support - but depends on prices obtained when sold
  (timing and method are key)
 Loans – over-collateralised, first call on assets and priced at market
  rates plus a premium
 NAO follow-up work over next few years




HELPING THE NATION SPEND WISELY
Have we been able to fully evaluate?
Still a lot to do….




HELPING THE NATION SPEND WISELY

				
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