Nationalisation remedy prescribed for B&B and Fortis

After another dramatic September weekend, British lender Bradford & Bingley (B&B) became the second UK bank this year to be nationalised, while pan-European financial services group Fortis received a massive capital injection from the governments of Belgium, the Netherlands and Luxembourg.

Following discussions between the Treasury, the Financial Services Authority and the Bank of England, the decision was made to sell B&B’s retail deposit business and branch network to Santander. The Spanish bank, the top bidder in a competitive auction arranged by Morgan Stanley, is also involved in takeover talks to acquire Alliance and Leicester.

The remainder of B&B’s assets and liabilities – including its mortgage book, personal loans business, headquarters, treasury assets and wholesale liabilities – will be brought under public ownership. The decision follows a similar course of action taken by the UK government in February to nationalise Northern Rock.

Alistair Darling, the UK Chancellor of the Exchequer, said the move would protect B&B’s retail customers. “Following recent turbulence in global financial markets, B&B has found itself under increasing pressure as investors lost confidence in its ability to carry on as an independent institution,” Darling said. “The FSA determined on Saturday morning that the firm no longer met its threshold conditions for operating as a deposit taker under the Financial Services and Markets Act 2000 and FSA rules.”

The transfer of retail assets to Santander will be backed by £18 billion of cash from the Treasury and the Financial Services Compensation Scheme. This will be initially funded through a short-term loan from the Bank of England, which will subsequently be replaced by a longer term government loan.

To give assurance to wholesale market institutions that have exposures to B&B, the government has put in place guarantee arrangements for six months to safeguard certain borrowings and deposits. The government is seeking state aid approval from the European Commission to extend these arrangements during the restructuring of B&B’s business.

The senior management of B&B – headed by chief executive Richard Pym – will remain in place during the initial period of public ownership.

Meanwhile, Fortis, which is listed in Brussels, Amsterdam and Luxembourg, on Sunday received an €11.2 capital injection for shares by the governments of Belgium, the Netherlands and Luxembourg. The move came after talks to sell all or parts of its business to BNP Paribas and ING broke down.

The Belgian government is paying €4.7 billion for a 49% stake in Fortis’ Belgian banking unit; while the Netherlands and Luxembourg governments will pay €4 billion and €2.5 billion for similarly-sized holdings in the firm’s banking businesses in those countries.