RBS: Osborne signals ‘good bank, bad bank’ split

GEORGE Osborne has signalled that he is prepared to break up the Royal Bank of Scotland (RBS) in a bid to recoup the £45 billion of taxpayers’ money used to bail the once all-conquering Scottish institution out in 2008.

By DAVID MADDOX Thursday, 20th June 2013, 12:36 am

The UK parliaments banking commission recommended the split is carried out urgently. Picture: Getty

The Chancellor announced last night that the Treasury would “urgently review” the recommendation from the Westminster’s banking commission that RBS should be split into a “good bank” and a “bad bank”.

In his keynote Mansion House speech in the City of London last night, Mr Osborne also strongly hinted that the government will start selling off its stake in Lloyds before the election. Following an initial sell-off of parts of Lloyds to institutions in the City, a public sale, with echoes of the 1980s “Tell Sid” campaign when members of the public were able to buy shares in the utilities at a knock down price, could be held.

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The announcement on reviewing the structure of RBS, a move strongly backed by the outgoing Governor of the Bank of England Sir Mervyn King, comes the day after the UK parliament’s banking commission recommended the split is carried out urgently.

The UK parliaments banking commission recommended the split is carried out urgently. Picture: Getty

Mr Osborne said he now believes the break up of RBS, which is 81 per cent owned by the taxpayer, would have been the best option for the bank when it had to be bailed out in 2008 at a cost of £45 billion, suggesting me may be minded to take that approach now.

Under the break-up plan, RBS’ bad assets, such as loans which people cannot pay back, would be taken on by the state. The successful or good parts of the business would be sold-off, with the hope this would cover the costs incurred by the treasury in 2008.

Such an approach would be similar to the partial sell-off of Northern Rock, which was split into what is now Virgin Money - the good arm - and the ‘bad bank’ the Treasury kept. However, the Chancellor made it clear last night that there would not be a quick sale of RBS.

He said: “I don’t want a quick sale of our RBS shares. I want the right sale – the right sale for the British people.

“I will only sell our stake in RBS when we feel the bank is fully able to support our economy and when we get good value for you, the taxpayer.

“In our judgment, when it comes to RBS that moment is some way off.”

Referring to the commission’s proposal for the break up of RBS he added: “There’s no doubt that, despite all the progress of recent years, RBS remains weighed down by too many poor assets – loans issued in the boom that have gone bad and may take a long time to improve.

“The question is – do we remove those poor assets from RBS, and set up what’s known as a Bad Bank?”

He explained that the option would enable RBS to focus on the good parts of its business – “supporting the British economy and maximising the benefits for the taxpayer.”

Giving a strong hint that he supports the proposal he said it should have happened five years ago.

He said: “With hindsight, I think splitting RBS into a good bank and a bad bank was probably what should have happened in 2008. That is with hindsight. I wasn’t in office. I didn’t suggest it in opposition. And I’m not criticizing my predecessor who had to act quickly in a desperate situation.

“The question before us now is not about what happened then, but what should happen now. Is taking bad assets that are still weighing down RBS out of the bank altogether the right answer today?

“Opinion is divided – some say the disruption isn’t worth it; others that it’s the only way we’ll really restore our banking system to health.

“I’ve always believed the answer for Britain is to confront the difficult decisions, not wish them away.”

He gave no time frame but promised that “the review will be swift.”

He said: “It will be conducted by the Treasury with external professional support. We’ll look at a broad range of RBS’s assets, but particularly assets in Ulster Bank and UK commercial real estate.

“We’re not prepared to put more taxpayer capital into RBS as part of this process.”

Mr Osborne explained that the creation of a Bad Bank depended on three objectives: if it supports the British economy; if it’s in the interests of taxpayers – and if it accelerates the return to private ownership.

He added: “If the review reveals that it would not achieve these things, then we won’t do it.

“We want to get on with this, so we’ll conclude the review and make a decision this autumn.”

The Chancellor’s hint appears to support suggestions that RBS chief executive Stephen Hester was forced to quit his position because he is known to be opposed to breaking-up the bank.

On Lloyds, the Chancellor made clear the beginning of the process of returning it fully to the private sector is on the cards, saying “Lloyds is in a good position. Investor interest is growing. And shares are already trading at around the price where selling would reduce the national debt.

He went on: “We will only proceed if we get value for the taxpayer. And we have no pre-fixed timescale or method of disposal.

“For the first block of government shares, an institutional placement is likely to be the most effective way of managing risk and getting value.

“So five years on from the financial crisis, we can now take the first steps to returning Lloyds to the private sector where it belongs.

“And for later sales of shares, we will consider a retail offering to the general public.”

The Chancellor also gave his assessment of the UK economy warning that situation in the eurozone “remains fragile” and “Britain remains encumbered by debts built up over many years.”

He said: “Recent volatility in financial markets is a reminder that no recovery from such a deep and damaging global recession is going to be straight-forward.

“But, equally, the economic news here in Britain has been better in recent months. The economy is growing.

“Record numbers are in work. Unemployment is falling. And the surveys of confidence and future activity are stronger.”

He insisted that despite the problems the UK economy “is healing”.

In his final Mansion House speech, the outgoing Governor of the Bank of England Sir Mervyn King warned that Britain’s historically low interest rates of 0.5 per cent were “unsustainably low”. But he added that a sharp hike in rates could be highly damaging to Britain’s nascent recovery.

“A rapid return to higher interest rates would do great damage to the balance sheets of highly indebted households, companies and, especially, financial institutions.”

The governor said he supported Osborne’s plan for a full review of the future structure of RBS.

He also said those who argued that higher levels of capital in banks was restricting lending were “wrong”.