Structure of Bradford & Bingley's nationalisation is clever

The manner in which taxpayers have been protected from Bradford & Bingley's ["BAD"] demise deserves applause.

The Financial Services Authority ["FSA"] deemed that the Bank no longer met the conditions for operating as a deposit taking institution, which invoked the provision of the Financial Services Compensation Scheme [ "FSCS"]. This scheme is funded by the banking industry and is designed to protect the first £35,000 of a customer's net deposits with an organisation, which I discussed previously here. This prompted a payout of £14bn to protect the assets of retail depositors to enable the deposits to be transferred to Abbey National plc. In addition, the Government backed up its' promise that no money will be lost by retail depositors i.e. unlimited guarantee by adding a £4bn to the pot that wasn't covered by the FSCS.

However, rather than drain other banks of cash to fund this payout, the Bank of England has lent the scheme the money on which it will charge interest [one-year LIBOR + 30bps], which will be converted into a three year loan by the Treasury. The Government also affirmed it stands behind the FSCS in meeting claims.

Hence shareholders will have borne the brunt of the collapse, followed by subordinated debt holders. Thereafter, the FSCS will absorb any shortfalls on assets, which the banking industry will be on the hook for. Only after each of these is exhausted, will the taxpayer be exposed.

Sadly, I haven't as yet figured out why they couldn't have done this with Northern Rock.

The Treasury statement can be found here.

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posted by John Wilson @ 9:49 AM Permanent Link newsvine reddit


At 2:30 AM, Anonymous Chris Harris said...

This summary is clear and helpful for shareholders and holders of the subordinated debt. What I cannot establish is how much capital was available for shareholders and subordinated debt holders at the moment when B&B was nationalised. Very broadly speaking this is the cushion which will be eroded by bad debts on the loan book. Where can I locate this information?


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