Calculators

Another one bites the dust

October 2008

UK mortgage lender Bradford & Bingley (B&B) is the latest financial institution to fall victim to the credit crunch. Trailing in the footsteps of Northern Rock earlier this year, B&B is to be nationalised following signs that public confidence in the company was on the verge of collapse.

The government took the decision to nationalise B&B amid growing speculation that the bank was in financial difficulties. Investors and lenders had become increasingly doubtful that B&B would be able to continue as an independent institution, and the company’s share price had plummeted.

Spanish banking giant Santander will pay £612 million for B&B’s retail branch network and savings business totalling £20 billion. Santander already owns Abbey and recently took over Alliance & Leicester, so the addition of B&B’s business increases Santander ’s presence in the British retail banking arena. Meanwhile, the government will take on B&B’s mortgages and loans, which total £50 billion. As part of the deal, Santander has been paid £4.5 billion from the UK Treasury, and the government has loaned a further £14 billion to the Financial Services Compensation Scheme to facilitate the transfer of B&B’s deposits to Santander.

Banco Santander Some commentators have criticised the terms of the deal, complaining that the UK taxpayer is taking on B&B’s risks while Santander gains its assets. B&B’s mortgage book includes high-risk self-certified mortgages and a large proportion of buy-to-let mortgages. UK investors reacted badly to the news, and share prices fell heavily – particularly in the vulnerable banking sector – following the announcement of the package. Politicians and financial analysts have also warned that UK taxes might have to increase in order to finance the deal.

However, Chancellor of the Exchequer Alastair Darling has defended the plan, arguing that the deal will help bring much-needed stability to the financial sector. The government had taken rapid action in consultation with the Financial Services Authority and the Bank of England, “to maintain financial stability and protect depositors, while minimising the exposure to taxpayers”. Mr Darling also sought to reassure detractors by confirming that the Financial Services Compensation Scheme will shield taxpayers from the risk of loss, and that any shortfall will be collected from the financial services industry.

The government has emphasised that, for savers and borrowers with B&B, it will be “business as usual”. However, this is likely to provide scant comfort for B&B’s shareholders, who will receive little or no compensation for their lost shares.

Another one bites the dust

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