Audit office backs secret loans to banks

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The Treasury's decision to lend support to the banking sector was "justified," an independent report has concluded.

The report from the National Audit Office defended the loans, saying that customers' money and the country's banking system were saved as a result of the secret loans.

The NAO said the cost to the UK public so far was £850bn.

The report comes after Mervyn King revealed the details of the vast sums lent to the banks.

Last week the Governor of the Bank of England told MPs of the Treasury's efforts to pump £61.6bn of taxpayers' money in to the failing banks last autumn.

Speaking today Amyas Morse, head of the National Audit Office, said that it would be "difficult to imagine the scale of the consequences for the economy and society if major banks had been allowed to collapse.

"The Treasury was justified in using taxpayers' money to safeguard savings and stabilise and restore confidence in the financial system."

Along with praise for the Treasury's actions, the report also points out that the cost to the taxpayer will not be known for a number of years.

"This will take time to answer," added Morse.

"What we do know is that how the eventual sale of RBS and Lloyds is managed will be crucial to protecting the public interest."

In April 2009 the Treasury estimated losses to the taxpayer to be between £20 billion and £50 billion.

The NAO's report states that the real cost will depend on the selling price for the government's holdings in RBS and Lloyds.

Morse said the government must be "mindful of the proceeds for the taxpayer but also of the implications for competition in the UK market, so that customers get a fair deal".

The report echoes chancellor Alistair Darling's statement to the Commons when he defended the secret loans, insisting that "essential" action was taken by the Bank of England.

The Treasury purchased shares in RBS and Lloyds Banking Group worth £37 billion last month, as well as agreeing to purchase another £39 billion of shares in both banks.

By April 2010 the Treasury expects both RBS and Lloyds to have refunded £100 million. The Treasury is monitoring their progress.

Both banks are currently on track in meeting retail targets set out as a condition of a recapitalisation scheme.

"As the crisis begins to subside, lessons must start to be learned," warned Morse.

"The authorities need to put formal arrangements in place to evaluate the effectiveness of the support provided to banks in order to inform future policy makers."