UK Bank Bailout Money ‘May Never Be Recovered’: Report

The U.K. taxpayer could lose the entire 66 billion pounds ($107 billion) paid to bail out struggling Royal Bank of Scotland (RBS) and Lloyds at the height of the credit crisis, according to a report by an influential group of UK members of parliament (MPs).

LLoyds TSB bank
Chris Ratcliffe | Bloomberg | Getty Images

"There is a risk that the 66 billion pounds invested in RBS and Lloyds may never be recovered," Margaret Hodge, chair of the Committee of Public Accounts, warned in a report into the sale of taxpayer-backed Northern Rock.

Northern Rock, a much smaller business based mainly on mortgage lending, was sold to Virgin Money last year with an estimated loss of 469 million pounds on the U.K. taxpayers' investment, after its "bad debt" was spun off. The committee of MPs said that the total loss to the taxpayer over Northern Rock was around 2 billion pounds, after alleged mismanagement of the bank when it was first nationalized under the Treasury, then led by Alistair Darling as Chancellor of the Exchequer.

"The Treasury was unable to respond promptly when the banking crisis hit because it lacked the right skills and understanding. It was slow to nationalize the bank and that made a loss difficult to avoid," Hodge said.

"After nationalization, it then failed to effectively challenge the optimistic business plan put forward by the bank's management to split the bank."

"We feel the sale of Northern Rock plc to Virgin Money was the best option, resulting in the best return for taxpayers following an open, competitive and fair bidding process," a spokeswoman for Virgin Money said.

The government had planned to eventually return to the market to sell its share of both Lloyds and RBS . However, both banks are still trading at hefty discounts to their share price at the time the government bought its stake. RBS chairman Philip Hampton said last month that he thought the government would be able to exit its investment in the bank in 2015. Stephen Hester, its chief executive, has floated the idea that the government should gradually sell off its stake, with the price hopefully rising over time.

"The lack of competition (for Northern Rock) does not fill us with confidence that the taxpayer will make a profit on the sale of the two banks which remain in public ownership, RBS and Lloyds," Hodge said.

The government would need to sell its 82 percent stake in RBS at around 500p to make back its investment. At the moment, RBS, which is in the middle of a belt-and-braces turnaround plan, is trading at 283p. The UK taxpayer also owns 40 percent of Lloyds, which fell into trouble after the then government pressurized it to take over HBOS. For the taxpayer to break even on their investment in Lloyds, its shares would have to sell at 63p - and they are currently trading at around 46p.

RBS and Lloyds declined to comment.

Written by Catherine Boyle, CNBC. Twitter: @cboylecnbc.