The FSA determined on 27 September 2008 that Bradford and Bingley no longer met its threshold conditions for operating as a deposit taker under the Financial Services and Markets Act 2000 and FSA rules. In response, the government transferred Bradford and Bingley's deposit book, branch network and relevant staff to Abbey National plc. As the latter did not wish to accept matching Bradford and Bingley assets, the transfer of the deposit book was facilitated by cash from the FSCS and the Treasury.
The FSCS paid Abbey National plc some £14 billion to enable retail deposits held by FSCS eligible claimants in Bradford and Bingley to be transferred. The FSCS financed the payout initially through a short term loan form the Bank of England, now repaced by a loan from the Treasury.
The Treasury paid £4 billion to Abbey (net of £612 million paid by Abbey) for the transfer of retail deposits not covered by the FSCS. In return, the FSCS and the Treasury have acquired rights to the proceeds of the wind down of the assets of the remaining business of Bradford and Bingley in public ownership. The Treasury will appoint an independent valuer to assess compensation payable to Bradford & Bingley's former shareholders.
For the first three years, the FSCS will pay interest on the loans at LIBOR plus 30 basis points and LIBOR plus 100 basis points for the following years. The first payment of interest will be in September 2009, with subsequent payments made at annual intervals, financed by levies on the financial service industry. The principal will be repaid over a number of years after March 2012, depending on prevailing market conditions and how swiftly Bradford and Bingley's business winds down.
As regards the repayment of principal, the banking sector will not be levied by the FSCS until it is apparent, which is likely to be a number of years in the future, whether the amount realised from the sale of Bradford and Bingley's assets covers the amount paid out by the FSCS.