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The Commons Committee of Public Accounts today publishes a report which, on the basis of evidence from HM Treasury, and separately from RBS and Lloyds Banking Group, examines the maintenance of financial stability and protection of the taxpayer.

The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, today said:

"The Treasury's Asset Protection Scheme, launched in January 2009 to protect RBS and, initially, Lloyds against further exceptional losses on their assets, helped to restore confidence and maintain financial stability. Treasury staff are to be commended for this noteworthy achievement.

There are areas of concern, however.  Both banks found it difficult to provide the Treasury with appropriate and robust data on their assets. We found this alarming. It places a question mark over the standards and practices of the banks themselves, and whether or not there was effective oversight by regulators and the banks' own auditors.

Secondly, the Treasury lacked effective sanctions against RBS and Lloyds when they failed to meet their targets for lending to small businesses in the first year of the Scheme. The Treasury appears to lack strong determination to use its influence to increase lending to small businesses. We expect it to find effective mechanisms to ensure the banks meet their lending commitments.

While the prospect of the Treasury's having to bail out RBS under the Scheme has receded, the risk remains that another severe economic downturn might change this. The Treasury must use the knowledge and experience it has built up over the last three years to protect the interests of the taxpayer if further interventions are required."

Margaret Hodge was speaking as the committee published its 31st Report of this Session which, on the basis of evidence from the Treasury, and separately from RBS and Lloyds, examined the maintenance of financial stability and protection of the taxpayer.

Background

In October 2008, the Government put in place measures to support UK banks, including purchases of shares in the Royal Bank of Scotland (RBS) and Lloyds Banking Group (Lloyds). The economic downturn continued to intensify, however, further undermining market confidence in the value of banks' assets.

To restore confidence, the Government launched an Asset Protection Scheme (the Scheme) in January 2009 to protect banks against further exceptional losses on their assets. During negotiations to finalise the Scheme, the Treasury remained alert to developments in the market throughout 2009 and made changes to the Scheme to better protect the taxpayer. As part of the Scheme, Lloyds and RBS agreed to meet published targets for lending to households and businesses.

Following the announcement that the taxpayer would protect banks' assets, market sentiment towards the banks stabilised, helping to achieve the Treasury's overriding aim to maintain financial stability. The development and implementation of the Scheme is a noteworthy achievement in which the commitment and skills of Treasury staff played a central part. Against this positive overall picture, there are a number of areas where further work could be undertaken.

The committee's findings

It is alarming that two of the UK's major banks were simply unable to provide sufficient data to assure the Treasury that their assets were not linked to fraud or other criminal activity. It raises questions on the management controls within the banks, the efficacy of regulatory oversight and the quality of audit provided to the banks. The lack of certainty on the nature of the assets put the Treasury in a difficult position and the Accounting Officer had to ask for a Direction from Ministers before proceeding with the Scheme.

While mortgage lending targets have been met, first year lending targets for businesses were not, despite assurances given by the banks to the Treasury.  In part this was because many businesses chose to repay existing borrowers. But subsequent research has indicated that tight credit supply is likely to have been the dominant influence on the level of lending in the economy.

With few mechanisms through the Scheme to encourage banks to help credit-worthy businesses in need of finance, the Treasury needs to develop other means of influencing banks' behaviour.  Simply changing the lending targets from a net to a gross basis risks reducing the pressure on the supported banks to increase credit.

The prospect of the Treasury having to bail out RBS under the Scheme has receded, but there is a small risk that any future recession may change this. The Treasury now needs to make sure that it retains the knowledge and experience it has built up over the past three years so that it can act to protect the taxpayer if interventions to support UK banks are needed in the future.