Value of taxpayer's holding in British banks plummets

Each family has invested £3,000 in bailed-out banks, with a paper loss of £11bn

By James Moore, Deputy Business Editor

Tuesday, 14 July 2009

Taxpayers are sitting on losses of nearly £11bn from the Government's "investments" in Britain's banks, the body charged with overseeing them admitted yesterday.

John Kingman, chief executive of UK Financial Investments, said every family in the country now had more than £3,000 invested in Lloyds Banking Group and Royal Bank of Scotland. The value of those holdings has plunged to £24bn since the Government stepped in, although the situation is considerably better than it was in February, when the unrealised loss stood at £18bn. The report says taxpayers' losses at Lloyds at the end of June stood at £6.2bn, with RBS worth £4.7bn less than when the Government stepped in.

The taxpayer has a 70 per cent stake in RBS and 43.3 per cent of Lloyds, but this is set to increase through the two banks' involvement in the Treasury-backed asset protection scheme to cover them against what could be multibillion-pound losses on bad loans.

UKFI's losses have been incurred because the shares in Lloyds and RBS are trading well below the prices at which the Government bought in when it effectively bailed the two banks out. They were detailed in UKFI's annual report, published yesterday.

Mr Kingman, who refused to publicly answer any questions about the report beyond a pre-prepared presentation, said selling the stakes at a profit for taxpayers was "at the heart of what we do", adding: "The public rightly expects to get their money back at a healthy return".

But the former Treasury official – on secondment to UKFI – insisted the organisation was "under no pressure" from ministers to make a sale, despite speculation that the Government would jump at a quick return in the run-up to a general election. He said no discussions on this were being held, and warned that the state's investment in the banks was likely to remain on its books for "years". "This is not and cannot be a short-term game," he added.

Such is the size of the Government's holding in the banks that there will have to be several sell-offs because the market would be unable to absorb a single deal. Options being considered include placements with institutions, a sale to a strategic investor, or even a wider, public sell-off which could include an offer to retail investors.

However, Mr Kingman refused to be drawn on a timetable, and would give no indication on what sort of return UKFI wanted to achieve on behalf of taxpayers. He also insisted that while UKFI would not be "a passive investor" in the banks, it would not "interfere with commercial management".

Despite the huge influence that its shareholding gives it over pay, UKFI said it would not put "unduly strict restrictions" on basic salaries and bonuses, arguing that doing this would harm the taxpayer's investment, although it does expect RBS and Lloyds to be "at the forefront" of a global rethink on remuneration packages.

The organisation has come under fire for the package handed to RBS's chief executive, Stephen Hester, which could pay him up to £10m.

Banks have agreed to start lending again as part of the Government's asset protection scheme, but this is being overseen by the Treasury, and it will have the responsibility of ensuring that they keep to their promises. Speculation has been mounting that Lloyds will have to write off up to £13bn on lending, including loans linked to commercial property and businesses as well as mortgages. It will post its half-year results on 5 August. Much of its problems stem from its hugely controversial merger with HBOS.

UKFI said that it had held more than 50 meetings with other investors in the bank, and said it was "vital" to ensure that a relationship of trust was built up if a successful sale is to be achieved.

Glen Moreno, the chairman of UKFI, who is working for free, declined to put a timetable on his departure. The Government is trying to find a permanent replacement, but it has been suggested that the job is not proving easy.