Stephen Hester’s departure highlights pressing need for RBS re-privatisation

 
James Barty

STEPHEN Hester’s agreed departure from RBS underlines just why Britain’s part-nationalised banks need to be back in private hands. Even the hint of political interference sent the bank’s shares tumbling. RBS closed down 3 per cent yesterday, having fallen much further during the course of the day.

Hester has long argued that state ownership is a barrier to running the bank on commercial terms. He has been forced to scale back RBS’s investment bank, for instance, and is likely to have to sell a stake in its US bank – Citizen’s – against his will.

It is little wonder that, asked to commit for another five years, Hester decided to call it a day. It’s not the government’s fault, particularly. All politicians are subject to pressures from public opinion, and these get mirrored in the pressure (direct and indirect) that gets exerted on the banks.

The fact that the government owns 81 per cent of RBS means anyone can express an opinion on what the bank should do. Hence all the various ideas for RBS’s future that have emanated from the work of the Parliamentary Commission on Banking Standards – with the suggestion that RBS be split into a good and bad bank one of the latest. How is a chief executive meant to keep his management team focused on the business itself?

This is precisely why we have argued that both RBS and Lloyds need to be moved into private hands as soon as possible. That means not just selling parts of the government holding, but getting all of it into private hands. Then and only then will the management be free to run the bank as it needs to.

In our recent report Privatising the Banks – Creating a New Generation of Shareholders, we examined the options open to the government to do this. Up until now, the idea has been to privatise the banks in stages, through sales to institutions. It has been reported that the Treasury is considering doing this for up to 10 per cent of Lloyds later this year. But we think that there are two main problems with this approach. First, it takes too long to privatise the banks in this way. Second, the shares would likely have to be sold at a discount to attract buyers, since the government is known to be a seller.

Turning an institutional offering into a traditional privatisation might get more shares sold. But it would still require a discount and would, in our view, be quite risky given the size of the likely offering. Equally, we think the idea of giving the shares away, as proposed by the Conservative MP Nadhim Zahawi, is unworkable because of the cost.

We have therefore backed a different scheme, which proposes distributing up to 70 per cent of the shares to taxpayers. The idea is that every taxpayer would be able to apply to receive shares. But instead of paying for them up-front, they would pay the government back at the point of sale. Because the repayment price is set at the time of distribution, there are no sellers below that price. This has the effect of eliminating the government overhang and forcing institutions to buy shares as the stocks get re-weighted. We estimate that this could trigger as much as £14bn of demand for Lloyds and RBS combined, giving the government much-needed cash from the sales.

We urge the government to adopt this approach and to announce it well in advance so that the markets know the government will truly exit. We suspect that alone would give the share price a significant boost. Arguments that the government should wait for shares to recover to the price originally paid before privatising are misplaced. The longer the banks remain in government hands, the more damage is potentially done, and the less the banks will be worth. And the government’s original purchase was not made as an investment, it was made to stabilise the financial system and allow the banks to rebuild. That process, as Hester has said, is nearly complete.

The next chief executive of RBS should demand that the government gives him or her a clear vision of the future of the bank. This must include a commitment to a full blown privatisation. Any potential candidate should accept nothing less, and we believe it is only in this way that the government can attract the right quality of candidate. After all, who would want to endure a repeat of Hester’s last five years? No sensible person would want that.

James Barty is senior consultant for financial policy at Policy Exchange. @PXFinance