4.20 Bradford & Bingley was a medium-sized mortgage savings bank with just over three million retail accounts and 197 branches. The company had specialised in buy-to-let and self-certified mortgages, which were likely to be vulnerable to default in an economic slowdown. The market lost confidence in the company, leading to a sharp fall in its share price. On 27 September 2008, the Financial Services Authority declared Bradford & Bingley to be in default for the purposes of the Financial Services Compensation Scheme (FSCS). On 29 September, following a competitive sale process, Abbey National plc, a subsidiary of the Spanish bank Santander, bought Bradford and Bingley's retail deposits and branches. The remainder of Bradford & Bingley's business was taken into public ownership and will be wound down.
4.21 The Treasury employed Morgan Stanley as its financial adviser at a fixed price of £1.5 million. Morgan Stanley's role was to advise on the transfer of Bradford & Bingley into public ownership and the sale of its retail deposits and branch network. In analysing the options available, Morgan Stanley shared its financial models with the Treasury.
4.22 Although the problems at Bradford & Bingley were different from those encountered by Northern Rock, the Treasury was able to use its experience to put in place a solution that protected financial stability while exposing the taxpayer to fewer risks than had been the case for Northern Rock.
4.23 The Treasury and other members of the Tripartite Authorities were not fully prepared to deal with the problems presented by Northern Rock, and had to react to events rather than leading them. In the case of Bradford and Bingley, the Tripartite Authorities were better prepared, having kept a watch on the company before market conditions made action necessary. The Tripartite Authorities' experience in considering the options for Northern Rock allowed them to plan a course of action and research the potential market for a sale of the business ahead of the need to take action.
4.24 The Banking (Special Provisions) Act 2008 allowed the Treasury to take into public ownership, or transfer to another owner, a bank or building society judged to be a threat to financial stability. Having used the Act for the nationalisation of Northern Rock, the Treasury was in a position to act quickly where financial stability was considered to be at risk.
4.25 Unlike Northern Rock, Bradford & Bingley had a higher proportion of retail to wholesale funding. It had been able to withstand a shortage of wholesale funding since September 2007. The company's assets had not been tested, however, by a severe recession and were seen by the market as being at higher risk of default in worsening economic conditions. As market conditions continued to worsen, Bradford & Bingley raised £400 million in a rights issue to avoid the company's capital being eroded. Late in September 2008, following the rescue of banks in the UK and USA and the collapse of Lehman Brothers, public speculation about Bradford & Bingley's continuing viability led to a loss of confidence and a marked increase in customers withdrawing their money.
4.26 As market conditions continued to worsen and the company's outlook deteriorated further, without any prospect of improvement in the near future, the Financial Services Authority decided on 27 September that Bradford & Bingley no longer satisfied the conditions needed to continue taking deposits. This decision triggered the operation of the Financial Services Compensation Scheme, an option that was not available in the case of Northern Rock unless the emergency support from the Bank and Treasury was withdrawn. The triggering of the Financial Services Compensation Scheme allowed the Tripartite Authorities to protect financial stability without having to put large sums of public money into a private sector company in difficulty:
■ a further run on Bradford & Bingley was avoided by taking it into public ownership and then transferring the deposit book to Abbey National, following a competitive process organised and run by the Treasury;
■ the deposit book was funded by a cash transfer to Abbey National by the Financial Services Compensation Scheme, which in turn was funded by a loan from the Bank, since novated to the Treasury;
■ the mortgage book will remain in public ownership and the lending to the Financial Services Compensation Scheme will be repaid as the mortgages in the book are redeemed. Any shortfalls are expected to be met by a levy on the commercial banking sector through the Scheme.