We reported this morning on high-level discussions in the government about the possibility of buying out the remaining 18 per cent of RBS that taxpayers do not already own.
The argument for doing so runs like this: we are already exposed to the vast majority of the bank’s hugely damaged balance sheet, and the losses only look like getting worse as we find out more about its distressed debt.
Given that, would it not be better to take advantage of our holding and actually use the bank to pump some credit into our stagnating economy?
At the moment, the problem with doing this is that it means making loans the bank does not currently consider commercially viable. That would be a dereliction of duty to the remaining private shareholders, who would have every reason to sue. The answer therefore is simply to buy them out, and actually use the government’s stake to achieve what it is trying to do.
Andrew Tyrie, the chairman of the Treasury Select Committee, came close to suggesting such a course of action back in February. He said:
All of us – and that includes the Government, Parliament and British taxpayers – need to decide whether we want to run RBS as a fully commercial bank at arm’s length from frequent intervention or whether we want it to be a bank on which we make special demands, ones we would not make of a commercial operation
Lord Oakeshott, the former Lib Dem Treasury spokesman, has also called for 100 per cent nationalisation.
But the Treasury remains openly hostile to the idea, for some very good reasons.
The first is that it would make it more difficult to realise a profit on the government’s stake. If the bank makes uncommercial loans, it is more likely to lose money, and whoever eventually buys it out of public ownership will pay less. The pro-nationalisation camp answers that the bank is already making heavy losses (£1.5bn in the first six months of this year, analysts estimate), and a share sale looks a million miles away. We might as well therefore admit defeat in trying to make a strong return and use the bank for the wider good.
Another powerful reason not to nationalise is that it is likely to contravene EU state aid rules. Although the government can seek an exemption to those rules – which they might be granted on the grounds that it is in the wider public interest – gaining such an exemption could take a long time, longer than many British businesses can wait for credit to start flowing again.
Finally, there is the cost issue. Do we really want to spend around £5bn of public money nationalising a bank and then making loans that its own management don’t want to make? Some, such as Alistair Darling, who first took RBS into public ownership when he was Labour chancellor, say the money would be better spent augmenting existing credit easing schemes.
Darling told me yesterday:
I would question whether the benefits would outweigh the undoubted risks you are taking on. We might be better off making changes to the credit easing schemes and looking at making sure the money from quantitative easing gets through to the high street.
Given all these problems, how has the idea of full nationalisation taken off at all? One official told me ministers were looking at the problems with getting credit flowing into the economy with “despair”. He admitted that buying the rest of the bank was hardly ideal, but suggested the government had simply run out of other options. It would be a desperate move – but these are desperate times.