Lawson, the former chancellor, has rightly asked the question of what to do about the ownership of RBS. But his suggestion – full nationalisation – has certainly raised eyebrows.
While the yearly debate about bonuses causes political headaches, it is well-acknowledged that RBS’s current management is “defusing the biggest balance-sheet time-bomb in history”. Longer-term state ownership, however, blunts decision-making, depresses value and hinders long-term competitiveness. It distorts competition by offering an explicit guarantee to certain firms and invariably leads to politically-directed lending decisions. In fact, it would be better to realise Sir Mervyn King’s ambition of getting the semi-nationalised banks back into the private sector as soon as possible.
But there are two key political hurdles that a re-privatisation would have to overcome. First, the cost of de-risking RBS, both in terms of its balance sheet and its regulatory capital, has eaten into its share price (now 328p), which is far below the 520p we initially paid. UK Financial Investments has told the Treasury that the cost of a “safer” regulatory environment for banking has been to wipe value off assets. Michael Cohrs from the Financial Policy Committee has said that he thinks we overpaid initially. Given the coalition’s aim was to recoup taxpayer investment, admitting that this can’t be achieved will cause bruised egos.
Second, sporadic sales of tranches of the stock through a conventional privatisation are predictable and easily exploited by the markets (see the US government’s initial placings of AIG). They are also likely to take so long that the destruction of value becomes self-fulfilling, especially given the lack of liquidity in the shares. The markets, not taxpayers, would be the beneficiaries of an improvement in the share price. The government may suffer from similar headlines thrown at Gordon Brown, for selling our gold “too cheaply”.
The Centre for Policy Studies and Portman Capital have been advocating an idea that would overcome these problems, ensuring best value is achieved while allowing taxpayers to benefit from future share price gains. The government would distribute shares back to all UK taxpayers for free, but charge a fixed amount for each share when it is sold on (the “floor price”). This holistic solution would see all shares returned to the private sector in one go, instantly removing the risk of a long-term cultural shift in the state-owned banks.
By creating millions of small shareholders, all making different decisions on when to sell, the supply-demand dynamic would be completely inverted. There would be no investment banking fees, and the interests of the public and the bank would be aligned. But most importantly, it would be UK taxpayers – those who bore the risk of bailing out the banks – who would benefit from any upside in the share price.
What better way to reignite the “popular capitalism” that Lord Lawson did so much to engender as chancellor?
Ryan Bourne is head of economic research at the Centre for Policy Studies.