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Bank Recapitalisation Scheme

Volume 483: debated on Tuesday 18 November 2008

I set out in my statements to Parliament on 8 October, Official Report, columns 277-280 and 13 October, Official Report, column 539, the details of the Government’s recapitalisation scheme. All UK incorporated banks—including UK subsidiaries of foreign institutions—with substantial business in the UK, and building societies, are eligible to apply for the scheme. To date, RBS Group plc and—subject to their merger proceeding—Lloyds TSB plc and HBOS Group plc have announced the terms on which they are participating. Those terms are set out in detail in the placing and open offer agreements, and in the preference share subscription agreements. I have today arranged for final, signed versions of the agreements to be placed in the Libraries of both Houses of Parliament.

I now set out the detail of dealing with future applications to the scheme from those banks which are currently raising capital—either by an agreement with HM Treasury or otherwise—and which, for whatever reason, may seek to negotiate a substantively new proposal or new agreement with HM Treasury about the terms of any recapitalisation. Detailed terms of participation would remain a matter for discussion with the board of the institution concerned, taking proper account of prevailing market conditions, but HM Treasury would expect to apply the following general principles:

The objective of the recapitalisation scheme is to ensure that each eligible institution has sufficient capital to sustain confidence in the institution. Institutions should therefore have a sufficient buffer of capital above the minimum requirement both to absorb losses that might ensue from a downturn and to continue lending on normal commercial criteria. In assessing any proposals in relation to eligible institutions, HM Treasury will continue to focus on three key objectives:

maintaining financial stability;

safeguarding the interests of taxpayers; and

protecting depositors and consumers.

In providing capital to any eligible institution, HM Treasury, on the advice of the Bank of England and Financial Services Authority, would need to be satisfied that these three objectives were met.

There is no automatic right of access to the recapitalisation scheme. At minimum HM Treasury would expect the following high-level conditions to be met before capital could be offered to any eligible institution:

the institution must have a plan to meet an appropriate level of capitalisation, as determined by the FSA. (Information about the FSA approach is set out in its statement of 14 November 2008). It is a matter for the institutions concerned to disclose to the market their capital requirement;

the institution must have a sustainable business model and delivery plan;

the institution’s funding profile, sources and mix must be clear, broad-based and sustainable; and the senior management team must be credible, with demonstrable ability to deliver the business plan.

If the Government are to provide capital, the issue will carry terms and conditions that appropriately reflect the financial commitment made by the taxpayer, including in relation to dividend policy, remuneration, lending policy and wider public policy issues.

To the extent that HM Treasury is asked to subscribe for, or underwrite, an offering for ordinary equity shares, the price would be at a discount to either the market price prevailing at the time of the transaction or, if applicable, the placing price agreed on 13 October, whichever is lower. The percentage discount would not be less than the percentage discounts applied in transactions already announced.

To the extent that HM Treasury is asked to subscribe for preference shares or other tier 1 instruments, the appropriate coupon will be based on prevailing market conditions, with due regard given to the rate at which eligible institutions have announced the issue of such instruments most recently.

With respect to fees, HM Treasury would charge an appropriate level of fees for any underwriting commitments, again paying due regard to the fees paid in recent transactions involving eligible institutions.

Any transaction would, of course, be subject to the necessary regulatory and legal clearances, and would need to comply with the European Commission’s decision of 13 October 2008 authorising the recapitalisation scheme under EU state aid rules.

Any securities acquired by HM Treasury under the recapitalisation scheme will be managed on a commercial basis by UK Financial Investments Ltd (UKFI). Details about UKFI are set out in my letter to the Chairman of the Treasury Select Committee of 3 November, which is available in the Libraries of both Houses of Parliament.