LISTENING to George Osborne at the Mansion House dinner last night, surrounded by the great and the good of the City, it was glaringly obvious why Stephen Hester (who wasn’t there) is leaving RBS.
Forget about the spin: Osborne is in charge (though how that tallies with his view that only experienced financiers should run City firms is unclear). He publically ordered RBS to sell its Citizens business in the US last night; he gave Hester and RBS’s chairman Sir Philip Hampton a (partly implicit) telling off, contrasting their performance unfavourably with that of Lloyds; he contradicted Hampton on the timetable for privatisation, saying that the bank wasn’t ready yet (so much for Hester leaving because a sell-off was imminent), announced an urgent review into whether RBS should be split into a good and bad bank; called for further cuts to RBS’s investment bank; and decreed that RBS had to be a domestically focused retail bank.
The chancellor claims that he is still keen to protect the value of taxpayers’ majority stake in the bank, and has rejected the Parliamentary Banking Commission’s call to scrap UKFI, the government’s holding company which is meant to protect taxpayer value. If I were one of the private minority shareholders in RBS, however, I would be seething with rage right now – I simply cannot see, despite Osborne’s protestations, how RBS is being run with the aim of maximising its value. The investment banking units of other universal banks are delivering large chunks of profit; to turn one’s nose up at that money makes no sense.
Osborne is also about to make another mistake with Lloyds: he wants to sell the first tranche of shares to institutions, rather than involve the public in the sort of mass distribution that is desperately needed to rebuild a shareholder democracy.
There are also many unanswered questions about the possibility of a good bank-bad bank RBS split. In part, it is a leaving present for Lord King (the other is his peerage, announced yesterday, in a typically British send-off). If we are to believe Osborne, he has yet to make up his mind as to whether or not to proceed with a split. But the fact that he has announced an enquiry into the question at such a high profile gathering suggests that he will probably go ahead with it. The first question is whether it will cost billions. I’m not a fan regardless: the policy might have made sense in 2008 but doing it now will merely cause massive disruption. The CBI was unusually forthright in its own denunciation of the idea last night, slamming the policy as “groundhog day”.
That said, I agree that there are dud assets cluttering up balance sheets, but my definition is much broader than the usual one. The common understanding is that toxic assets are made up of zombie firms and households, those who are only being kept alive either by the banks’ indulgence – and their desire not to crystallise losses – or by current low interest rates. To this some add over-valued property assets, though this is more contentious. But this definition of bad asset does not go far enough.
To me, a bad asset is one that cannot survive the end of QE and normalised bank rates, bond yields and property prices. One would need to stress test bank assets assuming interest rates were at five per cent or even eight per cent. The truth is that nobody really knows how many millions of borrowers would be unable to cope. My guess is that – when the day finally happens – it will be a disaster, that house prices will plummet and that banks will end up nursing huge losses. I also suspect that most of these assets would actually be left in a good bank today, making that entire exercise of creating a bad bank useless. Instead of rearranging the deckchairs, and trying to micromanage RBS, Osborne needs to start preparing the economy for a normalisation of monetary policy.
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