UK taxpayer may lose £2bn on Northern Rock rescue

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UK taxpayers could lose up to £2bn from the government’s 2008 rescue of mortgage lender Northern Rock by the time all the assets are wound down, according to the country’s spending watchdog.

The National Audit Office (NAO), an independent body that monitors value for money in government spending, said last year’s sale of part of the bank was a good choice and the loss should be seen as part of the overall cost of securing the benefits of financial stability during the financial crisis.

UK Financial Investments (UKFI), the body that holds Britain’s stakes in banks it rescued, has said the taxpayer will recover all of the cash provided to Northern Rock, but the NAO said that may be optimistic.

Britain nationalised Northern Rock in early 2008 after failing to fund a buyer after providing emergency liquidity support to the lender the previous year. After nationalisation the business was split into two companies.

A new stand-alone “good” bank, Northern Rock plc, was sold to Virgin Money at the end of last year. The second company, Northern Rock Asset Management, is running down the book of “bad” mortgages that were left, and remains in government hands.

The taxpayer will lose about £480m of its original £1.4bn investment in Northern Rock plc, the NAO said. Repayments of the support provided to NRAM will be spread over many years and be subject to changes in the economy.

UKFI expects to recover all the support provided to Northern Rock, including the loss on the sale of the “good” bank, and reckons the taxpayer will earn a return of 3.5 per cent - 4.5 per cent a year by the time all the assets run off.

But the NAO said a private-sector investor would require a higher rate of return as compensation for the risks taken. Its forecast of a loss of £2bn is based on applying a higher discount rate of 6 per cent a year to the cash flows.

The NAO said UKFI ran the sale of Northern Rock Plc well and the price paid by Virgin Money compared well with market prices.

Although Northern Rock Plc failed to meet its lending targets or deliver the performance expected during its two years of public ownership, no alternative was likely to have been significantly better, the report said.

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