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Contingent Liability Notification

Volume 647: debated on Monday 15 October 2018

I can today confirm that I have laid a Treasury Minute informing the House of the contingent liability that HM Treasury has taken on in authorising the sale of a portfolio of Bradford & Bingley (B&B) and NRAM loans acquired during the financial crisis under the last Labour Government.

On this occasion, due to the sensitivities surrounding the commercial negotiation of this sale, it has not been possible to notify Parliament of the particulars of the liability in advance of the sale announcement.

The contingent liability includes certain market standard time and value capped warranties and indemnities confirming regulatory, legislative and contractual compliance. The maximum contingent liability arising from these warranties and indemnities is approximately £49 million. There are further remote fundamental market-standard warranties which are capped at £983 million.

As part of the transaction, UK Asset Resolution (UKAR), the holding company for B&B and NRAM, also terminated interest rate swaps, which hedged the risk of changes in interest rates, held against these mortgage loans. These swaps were taken out by B&B and Northern Rock more than 10 years ago when the loans were issued, in line with good risk management practice. Due to the fall in long term interest rates, there is a substantial cost for terminating the swaps.

The net impacts of the sale and the termination of the swaps on a selection of fiscal metrics are as follows:

Public Sector Net Debt is reduced by £449 million in 2018-19;

Public Sector Net Borrowing is increased by a total of £100 million by 2022-23; and

Public Sector Net Financial Liabilities is reduced by £83 million in 2018-19.

UKAR will incur an accounting loss of £180 million on the transaction in 2018-19. UKAR is expected to make an overall profit in 2018-19.

The net present value of the assets if held to maturity was estimated by UKAR’s advisers to be £741 million using Green Book assumptions. UKAR received £943 million in exchange for the assets.

I will update the House of any further changes to B&B and NRAM as necessary.