Refinancing of loans for 2008/09 bank failures

8th March 2012

The Financial Services Compensation Scheme (FSCS) and HM Treasury have agreed terms for refinancing loans to the FSCS for the bank failures of 2008/09. FSCS borrowed £20.4bn from HM Treasury in 2008 to fund the costs of compensating consumers whose savings were put at risk by the failures.

When the loans were agreed, FSCS and HM Treasury committed to review the potential repayment schedule after three years in the light of prevailing market conditions with a view to agreeing new terms to come into effect from 1 April 2012. Subject to the final detailed agreement, that review is now complete.

With effect from 1 April, the interest on the loans will increase from 12 month LIBOR plus 30 basis points to 12 month LIBOR plus 100 basis points. This rate will be subject to a floor equal to the Treasury’s own cost of borrowing as represented by gilt rate for borrowing of an equivalent duration.

FSCS and HM Treasury have agreed the period of the loans will reflect the expected timetable for FSCS to realise assets from the estates of Bradford and Bingley and the other failed banks. FSCS expects to receive full re-payment of the debt of £15.6bn owed to it by Bradford and Bingley as the residual assets of the bank are wound up. The winding up of the estates of the other failed banks are expected to realise around 80%-90% of the outstanding debt over the next three years. The exception to this is London Scottish Bank for which the estimated recovery is 30%. FSCS expects to levy the deposit taking sector for the balance of the principal on the non-B&B loans.

There will be an annual cap on the amount of interest the industry will have to pay through FSCS levies. This cap will be set on the advice of the FSA (and in due course of the PRA) and take into account what the deposit-taking sector can afford having regard to other FSCS and regulatory commitments. Any interest charges exceeding the annual cap will be capitalised and repaid from levies on deposit-takers.

FSCS and HM Treasury have agreed that the terms of the agreement will be reviewed every three years in light of market conditions and of actual re-payments from the estates of the failed banks.

The FSCS believes this is a fair outcome for both taxpayers and the financial services industry, which funds it.

At the new rate, which comes into effect from 1 April, the likely interest costs for 2012/13 will be on the order of £510m. However, the final costs for coming years could change in the light of prevailing rates and the amount of recoveries the FSCS receives.

FSCS’ current intention, which will be reviewed in the light of market conditions, is to recover the remainder of the principal on the non-B&B loans, estimated to be £802m, by levying the deposit-taking sector in three roughly equal instalments beginning in 2013/14.

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