Sir Mervyn King has a plan to deal with RBS – but here’s a better one

Andrew Lilico
IN THE 1960s and 1970s, retail banking was a nationalised activity in Spain and Italy – fascists, gangsters and communists found nationalised banks an amenable tool of policy. Less keen on isms, the British commentariat regarded Labour’s suggestion at the 1983 General Election that the government should threaten the nationalisation of the banks as a lurch to the “loony left”.

Yet what seemed, in 1983, the preserve of foreigners and eccentrics became, from 2007, UK policy. We nationalised large parts of our banking system: Northern Rock, Bradford & Bingley, HBOS, RBS, Lloyds – the dominoes fell one by one. The most spectacular was RBS. The government took on 82 per cent of this multi-trillion pound universal bank, with its investment banking arm swollen by the 2007 takeover of ABN Amro.

Rather like many invasions, there are two sensible models for a bank nationalisation: the quick takeover, restructure and exit model; or the “you break it you own it” model, where you’re in for the long haul. Rather like many invasions, the government has done neither one nor the other.

Under majority government ownership, RBS has been restructuring, but more due to pressure from regulators and the Bank of England than from shareholders. The government has seemed unwilling even to use its role as shareholder to discipline RBS’s remuneration, preferring instead to pass general laws and regulations applied to all banks, not just the nationalised ones, in restricting bonus schemes.

Outgoing Bank of England governor Sir Mervyn King had always preferred the quick in-and-out model, wanting to create a bad bank from the toxic assets of various institutions and then to re-privatise the viable parts of RBS’s business. Failing that, he wanted the government to use its ownership to instruct RBS to lend money to certain institutions – small firms, certain sectors, certain regions – so that RBS could serve as a tool for economic policy.

Neither path was chosen, and King’s frustration boiled over yesterday in his evidence at the Banking Standards Commission, with his condemning the “whole idea of a bank being 82 per cent owned by the taxpayer, run at arms’ length from the government” as “nonsense”. He said “it should not take more than a year” to restructure a bank like RBS so it could be returned to the private sector, but noted that: “It’s four and a half years on and there is no immediate sign” of that happening.

What should really have happened in 2008 was what is now the policy for future banking crises: the bonds of bust banks should have been converted into equity to recapitalise them from their lenders, not the taxpayer. These new owners would then have made the necessary (and swift) decisions on restructuring RBS, breaking it up as necessary.

Instead, the government took it over. That being so, the government should be actively seeking to rid itself of these huge drags on its balance sheet (which, if bad losses arise, could yet bankrupt the UK government, much as Irish and Spanish banks bankrupted their governments). The longer it waits, the greater the risk of further losses, the more politically difficult it becomes to accept now inevitable losses on taxpayer equity injections (gone are the days when Vince Cable proclaimed confidently that we would make profits from bailing out the banks), the more the economy adjusts to low growth and low credit circulation from bust institutions, and the more comfortable the government becomes with stasis.

How could the government dispose of its RBS shares? It could break the bank into pieces, between “good” and “bad” banks, privatising the good bank which could then be a viable lender. But the government is very badly placed to know how to perform such a division, and it would inevitably become politically coloured.

The Centre for Policy Studies proposes that every citizen gets a share, on the model of certain Eastern European utility privatisations. Since those led to shares being hoovered up by oligarchs, with allocations bought for a bottle of vodka, I am sceptical. There is also the problem that 63m parts of worthless is still worthless.

An alternative would be to open up the RBS balance sheet, find further losses, and then declare that (sorrow!) the government’s equity has been wiped out so that it has no ownership or responsibility for RBS any more. That would fall to its bondholders, who now own one slightly-used bank. That would be my inclination.

If it were done when ‘tis done, then ‘twere well it were done quickly.

Andrew Lilico is chairman of Europe Economics.