Government discusses full buyout of RBS

Cabinet ministers are talking about fully nationalising RBS, but some think a fully state-owned bank could open a whole new can of worms for the banking sector. And George Osborne is dragging his feet, too...

by Michael Northcott
Last Updated: 19 Aug 2013

Talks between cabinet ministers and the Treasury are afoot about what to do next with the UK’s largest bank. Rumour has it that the business secretary, Vince Cable, is very keen for the government to buy out the portion of Royal Bank of Scotland that it does not already own. Vince reckons that a fully state-owned bank would be better at lending to small businesses and therefore benefit the wider economy. Sounds logical, but the difficulty is that the 17% he wants to buy will cost around £5bn, and the coffers are looking a bit empty these days.

This massive expense – and the Tory aversion to state-owned institutions – means the plans face a huge stumbling block. The chancellor, George Osborne, has also voiced his opposition to the plans, but his capital has been diminished after budget U-turns and economic disappointments. He is attempting to make amends for past transgressions, however – Osborne has just bowed to pressure from the business community by introducing the Funding for Lending Scheme, which went live yesterday. The initiative gives banks access to cheaper funds as long as they lend more freely, but there are fears that it won’t be enough to thaw the lending freeze.

But whilst buying out RBS is an alternative to toothless credit-easing schemes, several problems could be stirred up by a government buyout. If the bank is seen as a soft touch for both commercial and retail lending, it would skew the market and would put the bank’s privately-owned rivals at a disadvantage. This is exactly the kind of thing that EU caps on state aid are designed to prevent. The government already had to put the 83% purchase of RBS through a ‘UK Financial Investments’ instrument and run it commercially, just to comply with these EU rules. And anyway, analysts reckon an army of management figures would ditch the bank if it were nationalised – maybe they fear the government would waste no time reining in bonuses…

Ultimately, the guys who can dispatch the buyout cash are the Treasury, and they are hostile to the idea. Their strategy is to help RBS get back on its feet and then sell it back to the private sector. But with the recovery taking a lot longer than expected – and the government’s share having lost 60% of its value since the 2008 purchase – ministers are getting twitchy about what to do next. On the one hand the government condemns ‘excessive risk taking’ by banks, and on the other it lambasts them for not lending enough.

All the while, RBS insists it is lending as much as it possibly can without taking excessive risks, and in the meantime, CEO Stephen Hester has got huge RBS Libor fine to worry about. The saga continues…

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