The deal to nationalise Bradford & Bingley and sell its savings and branch network to a Spanish bank has transformed the landscape of UK banking.
The deal to nationalise Bradford & Bingley and sell its savings and branch network to a Spanish bank has transformed the landscape of UK banking.
The Sale
After 12 hours of talks, Spanish bank Santander finally agreed to buy Bradford & Bingley's £21bn savings business and branch network for about £600m.
The sale, combined with nationalisation of the rest of the bank, was described by the Treasury as the best way of maintaining financial stability and protecting consumers and taxpayers after attempts to find alternative private sector solutions for Bradford and Bingley failed.
Santander, which already owns Abbey and is taking over Alliance & Leicester, will now take on Bradford & Bingley's network of 197 branches and 140 agency outlets plus the £21bn deposits as well.
Kevin Mountford, head of banking at moneysupermarket.com, was critical of the "cheap" deal.
He said: "Confirmation that Bradford & Bingley is to be broken up will come as a surprise to nobody. What is a surprise is that Santander seems to have walked away with such a bargain.
"In the new world where retail deposits are king Santander has landed all £21bn deposited by B&B's savers at a price that looks extremely cheap."
The New Bank
There were inevitable fears for jobs as the latest bank to founder was saved through a public/private buy out.
The Treasury said yesterday that while "some" employees were now effectively working under Abbey, they should all go to their workplace "in the normal way" and all Bradford & Bingley's branches, including 12 in Scotland, plus its call centres and internet operations would be open for business as usual.
Initially the senior management team of Bradford & Bingley including chief executive Richard Pym will remain in post to oversee the transition. But the government added that "over time" it would look again at management to see if efficiency could be improved.
The Treasury also said that the savings business would continue to operate as normal throughout the changes with branches, ATMs and on-line accounts all continuing to operate.
Under the Santander deal, savers' money will be transferred from Bradford & Bingley to Abbey.
While worried customers have been withdrawing their money and closing their accounts, Bradford & Bingley yesterday stressed that people's savings would be "secure in a well-funded bank" as a result of the sale.
The government echoed that reassurance, stating that the transfer is backed by cash from the Treasury and the Financial Services Compensation Scheme (FSCS) to guarantee people's money.
But Mr Mountford yesterday warned customers to be prepared to move their money if necessary in order to qualify for the government's guarantee - which safeguards individual deposits of up to £35,000 with any one financial group.
He said: "While many savers will no doubt feel relieved this morning, we will need to wait and see whether the remains of Bradford & Bingley keeps its separate FSCS registration, or whether Bradford & Bingley savers who also have money in either Alliance & Leicester and Abbey will need to move it again to stay below they £35,000 compensation limit."
Toxic remains
The remaining assets and liabilities of Bradford & Bingley - its mortgage book, personal loan book, headquarters and "relevant staff", treasury assets and wholesale liabilities - were all put under public ownership yesterday.
But while the government will take over the mortgage side of the bank, it is winding down the business and will not lend any more money. In return, the FSCS and the Treasury have the rights to the proceeds of the wind-down and realisation of the assets of the remaining business of Bradford & Bingley in public ownership.
Borrowers were advised to keep making payments as usual while the government seeks to recover money from any who default.
After six months, the government plans to replace existing guarantee arrangements to safeguard certain wholesale borrowings and deposits through state aid approval from the European Commission as part of the restructuring of Bradford & Bingley.
Consumer groups warned that the move would leave people stuck with poor deals and unable to secure better ones.
Louise Cuming, head of mortgages at moneysupermarket.com, said: "With the mortgage book now, effectively, being run down by the government there is no incentive for them to keep rates competitive."
Shareholders
As the focus remains on savers and borrowers, compensation for shareholders looked increasingly unlikely.
The listing of Bradford & Bingley's shares was cancelled as the government took over, announcing that all share options and other entitlements to shares issued by the company had been "extinguished".
The loan
The most complex part of the deal involves two loans being taken out to guarantee the deposits in the bank.
As B&B is in severe financial difficulty, it does not necessarily have the money to keep the government's guarantee of protecting savers' deposits up to £35,000.
So the FSCS has taken a short-term loan from the Bank of England of roughly £14bn to cover these deposits held in Bradford & Bingley which will now be transferred to Abbey.
The Bank of England loan to the FSCS will be replaced by one from the government after "a short period of time". Conscious of public concern that taxpayers will end up paying for banks' mistakes or mismanagement, the Treasury said yesterday that banks themselves will be expected to repay the loan through the FSCS, which the banks pay into.
The first repayment for interest for around the first six months of the loan is to be made next September 2009 and is likely to be approximately £450m. After the first three years, the loan is set to be refinanced by the Treasury, In essence, the remaining banks will have to pay for the sins of Bradford & Bingley. That could cost them £9bn - something which will no doubt be passed on to customers and shareholders.
