Taxpayers Landed With Initial Bill for B&b Rescue

The nationalization of Bradford & Bingley is a complicated process that will initially put the burden on the taxpayer while the high street banks could end up picking up the bill for protecting customers' deposits. But Alistair Darling is hoping to reduce the burden on the taxpayer and the banks as the buy-to-let lender's customers pay off their mortgages.

The high street banks could end picking up the bill for the Financial Services Compensation Scheme that protects the first £35,000 of customers' deposits. In B&B's case this will amount to £14bn. Bank customers could end up paying higher prices for services if the banks look for ways to pass on any costs to them.

Financial Services Compensation Scheme

Alistair Darling has been forced to use £14bn of taxpayer funds to support the Financial Services Compensation Scheme which pays out when banks collapse and guarantees the first £35,000 of savings.

The FSCS is funded by the financial services industry and has just £5m in its kitty from last year's levy. It will now have to make fresh calls on the banks to make interest payments on Darling's £14bn loan and will ultimately hope that the recovery of funds from B&B will help pay off the loan.

The terms of the £14bn loan are clear: for the first three years the FSCS must pay interest on commercial terms . This could amount to a total of £1.8bn in interest payments over three years if interest rates stay at their current level and none of the principal loan is paid off.

The FSCS has admitted it would have to ask banks, building societies and other deposit takers to find £450m next September to cover the first of the half-yearly interest payments.

Under the terms of the FSCS, this suggests that the burden will fall most heavily on the biggest savings institutions. Lloyds TSB, after its takeover of HBOS, will have a market share of more than 25% of the savings industry - indicating that it could pick up the lion's share of the bill.

At the end of the three-year interest only period, the Treasury and the FSCS will need to review the loan and an assessment made of how the principal on the loan will be repaid. Only then will it become clearer how big the bill will be.

Mortgages

As a result of the nationalization, the Treasury is taking £41bn of B&B mortgages on to its books. Darling said yesterday: "The first way of redeeming the costs that we are incurring comes from redeeming the assets of Bradford and Bingley. If that isn't enough, then there will be a claim under the compensation scheme."

He also said it might not be as easy to convince customers to desert B&B and take their loans elsewhere because of the difficulties many borrowers would have obtaining credit at another bank. "It does have more buy-to-let and self-certification mortgages - where, frankly, people just said what they earned and that figure was taken as fact - than we would like," said Darling.

Even so the authorities are hopeful that the bill for the banks and the taxpayer will be substantially reduced by interest payments on loans.

Santander

Darling has also had to hand £4bn to the Spanish bank Santander to guarantee the deposits of those customers whose savings fall outside the scope of the FSCS scheme. The remaining £3bn of the £21bn of savings held by Bradford & Bingley were already in its coffers and will be transferred to Santander.

But the Treasury is not expecting Santander to repay any of the £4bn it is receiving to guarantee customer deposits.

The Treasury is hoping to recoup the money paid to Santander as customers make interest payments on their B&B mortgages and, hopefully, pay them off in their entirety.

The public finances

According to Capital Economics, the immediate impact of the nationalization will be to increase the government's net debt. The government defines this as financial liabilities minus liquid financial assets. B&B had £51bn of financial liabilities at the end of June, £22bn of which were retail deposits which have been sold to Santander.

"Given that B&B did not have a substantial holding of liquid assets, this suggests that net debt could rise by £30bn or 2% of GDP," said Paul Dales, UK economist at Capital Economics.

This is much smaller than the £90bn added to net debt by the nationalization of Northern Rock but the two banks together could push the ratio of net debt to GDP up from 37% to 45%.