Pressure on Britain to quit bailed-out banks
The three stalwarts of the British establishment - Justin Welby, Nigel Lawson and Mervyn King - are all calling for the break-up of the part-nationalised Royal Bank of Scotland. They are part of a growing debate in Britain about what to do with the bank and its rival, Lloyds, which received more than $US103 billion combined in bailouts during the financial crisis.
Nearly five years after British taxpayers first took stakes in the lenders, the government is preparing to reduce its holdings before the next election, expected early in 2015. The government owns 81 per cent of RBS and 39 per cent of Lloyds.
Yet, unlike the share sales in financial giants like Citigroup that allowed the US government to make a profit, the prospective offerings in Britain may be more difficult.
The two banks are still cleaning up their balance sheets and selling unwanted assets that could put off new investors. Both continue to come under pressure to increase lending to the struggling economy. And the timing of any share sale, which could come as early as next year, may lead to losses for British taxpayers - potentially angering voters.
Elisabeth Rudman, an analyst with credit rating firm DBRS, said the two British banks were in much worse shape than their American counterparts. RBS was not only burdened by its participation in the acquisition of the Dutch lender ABN Amro, but it had large exposure to imploding real estate markets such as Ireland.
The critical element in the government's effort to shed its banks stakes is timing. Later this month, George Osborne, the Chancellor of the Exchequer, will present his strategy to return the two banks to the private sector. His plan will come soon after the findings of a parliamentary committee that will outline how the firms could be privatised.
Many of the committee members are calling for the break-up of RBS to carve out the most risky assets.
"I get confused by all the talk about waiting," said Ian Gordon, a banking analyst with Investec in London, adding that the British government should sell the stakes tomorrow. "Can we sell the shares now? Of course we can."
The fortunes of the two banks have improved since their huge bailouts.
RBS has been gradually digging itself out of its ill-judged ABN Amro acquisition in 2007. The bank has shed billions of dollars from its balance sheet and cut about 40,000 jobs over the past five years. It has also slashed its investment banking operations, which came under scrutiny this year after RBS was forced to pay a $US612 million fine connected to the Libor rate-rigging scandal .
For any prospective share sale in the two banks to be a success, the government must convince voters that the offerings would benefit the economy after taxpayers spent billions to rescue the two lenders.
NEW YORK TIMES
Frequently Asked Questions about this Article…
Senior figures including the Archbishop of Canterbury, former chancellor Nigel Lawson and outgoing Bank of England governor Mervyn King have urged a break‑up of RBS to carve out its riskiest assets. The calls form part of a wider debate about how to return RBS to a healthy private bank after its bailout and large problem exposures.
According to the article, the UK government owns around 81% of RBS and about 39% of Lloyds after taking stakes in the lenders during the financial crisis.
The two banks received more than US$103 billion combined in bailouts during the financial crisis, making them two of the biggest recipients of government support in Britain.
The government was preparing to reduce its holdings ahead of the next UK election (expected early in 2015) and planned a strategy to be presented by Chancellor George Osborne. The article notes share sales could come as early as the following year, but timing is described as a critical and sensitive issue.
The article highlights several challenges: both banks are still cleaning up balance sheets and selling unwanted assets, they face pressure to increase lending to a weak economy, and poor timing of any sale could create losses or political backlash. Those factors may deter new investors and make offerings trickier than similar US share sales.
RBS has been trimming exposure from its 2007 ABN Amro acquisition, shedding billions from its balance sheet, cutting about 40,000 jobs, and scaling back investment banking after a US$612 million Libor‑related fine. The article says the fortunes of both banks have improved, but they still face asset clean‑ups and risky exposures that worry analysts.
Analysts quoted in the article say the two British banks were in worse shape than their American counterparts. Unlike the US, where some government share sales produced profits, RBS and Lloyds still have large problem assets and ongoing restructuring that could reduce investor appetite and complicate profitable sell‑downs.
The article says timing is the critical element. For a successful privatisation the government must choose the right moment, address risky assets (the parliamentary committee has suggested breaking up RBS), and convince voters the offerings will benefit the economy after taxpayers spent billions on rescues. Without that confidence, offerings could be unpopular or produce losses.
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