Selling The People's Banks

March 31, 2010 10:46 AM

In case you'd somehow forgotten, we taxpayers are forced mega-investors in a number of banks.


Our two biggest holdings are RBS and Lloyds. In the case of RBS, we own 84% of the equity, and in the case of Lloyds, 41%.


These holdings cost us a total of £65.8bn - £45.5bn for RBS, and £20.3bn for Lloyds (not forgetting that we have also agreed to pump a further £8bn into RBS should they need it, giving us an overall potential exposure of £74bn - see this blog).

Yesterday there was a fascinating roundtable discussion organised by Public Finance magazine. The first issue on the table was
how to get the best value for taxpayers from these stakes, and there were some very different views.

So what is in taxpayers' best interests? Should we begin a sales programme, hold, or do something else?

The price of bank stocks has recovered hugely since the pit of the crisis, and with official interest rates close to zero, right now banks are once again highly profitable. While they are all still suffering from write-offs on bad loans, last year
the net earnings of UK banks hit an all-time record of £51bn, smashing the record £42bn earned in 2007. Over the last 12 months, Barclays shares are up 140%, and the broader financial sector has roughly doubled. And both are now above their levels before the Lehman collapse.

And our
holdings?

Hmm... not
quite so good. In fact, despite the roaring bull market, we are still underwater on both Lloyds and RBS. In fact, at today's prices, our combined stake is only worth £57bn - £8bn down on what we paid.

Well how can that be, you ask. Surely we bought in at rock bottom fire sale prices - we
must have shared the market ride since then.

Unfortunately not. True, there's been some modest appreciation since the absolute pit, but our banks have been held back. Partly, that's because the market knows we're going to sell at some stage. But more fundamentally, it's because the market doesn't like the message it gets from our politicians on the future of these banks.

In particular, it worries that government intervention will stop RBS and Lloyds paying enough to attract and retain talent, and will also direct the banks' lending activities. In other words, continued political control is eroding the market value of our investments.

So how can that be in taxpayers' interests? Shouldn't we crack on with a sales programme before we lose even more value?


 


The majority view in yesterday's discussion was that HMG should balance getting a good price for our stocks against two other objectives: the need to increase competition in the banking sector, and the need to increase lending to "desirable" borrowers.

So we need to think in terms of breaking up our banks in order to increase the number of competing providers in the market. And also we need to get our state-owned banks to lend more liberally in order to improve the overall flow of credit to small businesses. Maximising returns from the sale of our stakes was felt to be far too narrow a view of these broader taxpayers' interests.


 


Unfortunately, such a broad conflation of objectives is likely to prove expensive. In terms of taxpayer value, the state has a poor record in the banking industry:



  1. The National Girobank was set up by the Wilson government in 1968 to provide banking services to the unbanked masses. But after two decades of support, and several failed relaunches, it was finally sold cheaply to the private sector in 1990.

  2. Governments are notoriously bad at picking winners. If we insist on our banks lending more to "desirable" borrowers, the banks will lose more from defaults. A recent government study of experience with the Small Firms Loan Guarantee Scheme noted that the two-year default rate was between 25% and 45% - a disaster in commercial terms (and see this blog).

  3. Increased competition should be good for consumers, but almost certainly not for existing bank shareholders. And if we break up our banks without changing the competition rules for everyone else, we are not going to get much of price.


Of course, if you think it's worthwhile taxpayers spending a large chunk of our £57bn on desirable social objectives like more competition in high street banking and cheaper loans for worthy borrowers, then that's a view you can certainly hold.



But speaking as a taxpayer, your correspondent would far rather use the money to pay off some of that horrendous debt mountain. Competition issues and tax-subsidised soft loans should be dealt with separately, out in the open where we can all see them.

(Also note that - political
egg-on-face aside - there's nothing magical about the price at which we purchased our bank stakes. While it would obviously be nice to make a profit, there is no economic reason to wait until our shares have broken even against our purchase price before we sell. Bygones are bygones, and we should focus on getting the best price attainable now).

PS Monday's
Treasury Select Committee report - Too important to fail gives a good overview of the risks posed by overlarge banks. True, it doesn't reach final conclusions on what if anything we should do about it, but it does set out the issues very clearly.


In case you'd somehow forgotten, we taxpayers are forced mega-investors in a number of banks.


Our two biggest holdings are RBS and Lloyds. In the case of RBS, we own 84% of the equity, and in the case of Lloyds, 41%.


These holdings cost us a total of £65.8bn - £45.5bn for RBS, and £20.3bn for Lloyds (not forgetting that we have also agreed to pump a further £8bn into RBS should they need it, giving us an overall potential exposure of £74bn - see this blog).

Yesterday there was a fascinating roundtable discussion organised by Public Finance magazine. The first issue on the table was
how to get the best value for taxpayers from these stakes, and there were some very different views.

So what is in taxpayers' best interests? Should we begin a sales programme, hold, or do something else?

The price of bank stocks has recovered hugely since the pit of the crisis, and with official interest rates close to zero, right now banks are once again highly profitable. While they are all still suffering from write-offs on bad loans, last year
the net earnings of UK banks hit an all-time record of £51bn, smashing the record £42bn earned in 2007. Over the last 12 months, Barclays shares are up 140%, and the broader financial sector has roughly doubled. And both are now above their levels before the Lehman collapse.

And our
holdings?

Hmm... not
quite so good. In fact, despite the roaring bull market, we are still underwater on both Lloyds and RBS. In fact, at today's prices, our combined stake is only worth £57bn - £8bn down on what we paid.

Well how can that be, you ask. Surely we bought in at rock bottom fire sale prices - we
must have shared the market ride since then.

Unfortunately not. True, there's been some modest appreciation since the absolute pit, but our banks have been held back. Partly, that's because the market knows we're going to sell at some stage. But more fundamentally, it's because the market doesn't like the message it gets from our politicians on the future of these banks.

In particular, it worries that government intervention will stop RBS and Lloyds paying enough to attract and retain talent, and will also direct the banks' lending activities. In other words, continued political control is eroding the market value of our investments.

So how can that be in taxpayers' interests? Shouldn't we crack on with a sales programme before we lose even more value?


 


The majority view in yesterday's discussion was that HMG should balance getting a good price for our stocks against two other objectives: the need to increase competition in the banking sector, and the need to increase lending to "desirable" borrowers.

So we need to think in terms of breaking up our banks in order to increase the number of competing providers in the market. And also we need to get our state-owned banks to lend more liberally in order to improve the overall flow of credit to small businesses. Maximising returns from the sale of our stakes was felt to be far too narrow a view of these broader taxpayers' interests.


 


Unfortunately, such a broad conflation of objectives is likely to prove expensive. In terms of taxpayer value, the state has a poor record in the banking industry:



  1. The National Girobank was set up by the Wilson government in 1968 to provide banking services to the unbanked masses. But after two decades of support, and several failed relaunches, it was finally sold cheaply to the private sector in 1990.

  2. Governments are notoriously bad at picking winners. If we insist on our banks lending more to "desirable" borrowers, the banks will lose more from defaults. A recent government study of experience with the Small Firms Loan Guarantee Scheme noted that the two-year default rate was between 25% and 45% - a disaster in commercial terms (and see this blog).

  3. Increased competition should be good for consumers, but almost certainly not for existing bank shareholders. And if we break up our banks without changing the competition rules for everyone else, we are not going to get much of price.


Of course, if you think it's worthwhile taxpayers spending a large chunk of our £57bn on desirable social objectives like more competition in high street banking and cheaper loans for worthy borrowers, then that's a view you can certainly hold.



But speaking as a taxpayer, your correspondent would far rather use the money to pay off some of that horrendous debt mountain. Competition issues and tax-subsidised soft loans should be dealt with separately, out in the open where we can all see them.

(Also note that - political
egg-on-face aside - there's nothing magical about the price at which we purchased our bank stakes. While it would obviously be nice to make a profit, there is no economic reason to wait until our shares have broken even against our purchase price before we sell. Bygones are bygones, and we should focus on getting the best price attainable now).

PS Monday's
Treasury Select Committee report - Too important to fail gives a good overview of the risks posed by overlarge banks. True, it doesn't reach final conclusions on what if anything we should do about it, but it does set out the issues very clearly.


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