U.K. Banks Have Big Incentive to Finance Bradford & Bingley Sale

  • Sale would trigger reduction in annual FSCS charges for banks
  • Britain seeking to follow sale of Northern Rock mortgages

Britain’s biggest banks will be more eager than usual to finance buyers of a loan portfolio the government plans to sell. That’s because the sale could save them hundreds of millions of pounds on an annual levy.

Disposing of collapsed bank Bradford & Bingley’s assets would lead to a reduction in their payments to the U.K.’s Financial Services Compensation Scheme, imposed on banks from Barclays Plc to Royal Bank of Scotland Group Plc. The government is considering ways to sell part of the lender’s 26 billion-pound ($38 billion) loan portfolio, said people with knowledge of the matter, who asked not to be identified as they weren’t authorized to speak publicly.

Britain’s largest banks collectively have paid more than 2 billion pounds to the FSCS since 2009 to cover interest on the 15.6 billion pounds the deposit protection program borrowed from the treasury to fund the rescue of Bradford & Bingley, according to data on the agency’s website. The charge tied to Bradford & Bingley accounts for half of the proposed 703 million-pound FSCS levy in 2016, the data show.

“There’s a disappearing cost story for the banks,” said Ian Gordon, an analyst at Investec Plc in London. “To the extent the buyer needs finance, there’s a commercial rationale as these are good quality assets. But there’s an ancillary benefit to banks in general from a reduction in the FSCS levy.”

Northern Rock

Chancellor George Osborne is looking to dispose of more of Britain’s bailed-out banking assets to help narrow the nation’s budget deficit after agreeing to sell 13 billion pounds of loans from collapsed bank Northern Rock to U.S. private-equity firm Cerberus Capital Management in November. Whipsawing markets have forced him to pause the sale of shares in Lloyds Banking Group Plc, which remains 9.2 percent owned by taxpayers.

U.K. lenders took a back seat to their U.S. counterparts in the Northern Rock sale, which didn’t feature a reduction in the FSCS fee. Morgan Stanley led a group of banks financing Cerberus’s acquisition of the remnants of Northern Rock, while the assets also drew interest from JPMorgan Chase & Co., Citigroup Inc. and Goldman Sachs Group Inc.

UK Asset Resolution Ltd., which manages nationalized banking assets, is in the early stages of examining which parts of the Bradford & Bingley loan book it could sell, said the people. Credit Suisse Group AG is helping oversee the process, said one of the people. Officials for UKAR and Credit Suisse declined to comment.

The U.K. owns about 26 billion pounds of the former consumer bank’s assets seven years after it was rescued in the financial crisis, according to data on UKAR’s website. Most of the loans are interest-only, buy-to-let mortgages made to about 148,000 customers.

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