RBS nationalisation mooted by fed-up government

Aug 2, 2012

Frustration at failure of banks to lend gets anti-Osborne forces talking

SHOULD the government, frustrated at the continued failure of high street banks to lend more, grasp the nettle and fully nationalise RBS?

The government currently owns 82 per cent of RBS – a legacy of the 2008 bailout it was forced to provide at the height of the financial crisis. Today the Financial Times reports that the Cabinet has been considering buying the other 18 per cent of RBS for £5bn.

Chancellor George Osborne is apparently opposed to the idea. But the FT says the fact the Cabinet is even discussing the idea "shows how exasperated [ministers] have become at the barriers they believe banks are placing on lending".

The Cabinet's pro-nationalisation faction is led by Lib Dem Business Secretary Vince Cable, according to The Guardian. It says that Cable "is thought to feel emboldened by the botched lending schemes already introduced by Osborne, who presided over an economy which contracted by 0.7 per cent in the last quarter". The paper observes that a scheme called 'funding for lending' was launched yesterday to replace the national loan guarantee scheme.

The case for nationalisation stems a belief that attempts to get banks to offer more loans have failed – and something must be done to haul the UK out of three consecutive quarters of negative economic growth. Ministers therefore want to force RBS to lend more, but to do so under the current corporate structure would leave the government open to legal action from other shareholders. Nationalising the entire bank would avoid that situation.

The case for nationalisation has been bolstered by RBS's poor performance. The bank is expected to announce a half-year loss of £1.5bn later this week and faces fines for the Libor scandal and an IT systems collapse earlier this year.

The FT observes that the government might feel that if it has to "absorb the effects of more bad debt, it should at least enjoy the benefit of being able to manage the bank directly".

There are a number of obstacles to nationalisation, however. An industry source told Reuters that EU regulators would be unlikely to allow a state-owned RBS to aggressively undercut rivals on lending, and the government might shy away from the prospect of attracting more criticism over bonuses, lending and issues like the Libor interest rate rigging scandal which would be inevitable if it became owner of RBS.

Another obstacle is George Osborne's ideology, says George Eaton on the Staggers blog. "With the economy now in a deep recession, the nationalisation of RBS is exactly the sort of game-changer the government should pursue," he writes. "But Osborne's ideological preference for the private sector will, one suspects, again prevent a necessary step towards recovery."

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Another half bake idea from Osborne. Banking rules are the same whoever owns the bank, changing ownership will make no difference.