6 Mar 2013

King: Split RBS to save the UK economy

The Governor of the Bank of England Sir Mervyn King has shocked the UK Banking Commission by hinting at the need to take full control of  RBS temporarily, at initial public expense. He concretely suggested that RBS be split into a “new RBS” good bank adequately funding small businesses, and a bad bank with loss-making assets. This is not the current plan being executed by chief executive Stephen Hester.

Sir Mervyn told parliamentarians that RBS was effectively one of the biggest drags on the whole UK economy, and needed to be sorted out sooner rather than later, and repeatedly suggested that “nothing has been achieved” at RBS.

His plan was backed enthusiastically by former chancellor Nigel Lawson as the biggest contribution to SME lending and therefore growth. But the approach has recently been ruled out by the current chancellor, on the grounds of public finances.

Sir Mervyn said that the public finance impact would be ignored by markets and was not an excuse for failing to recognise losses and that RBS is “worth less than we thought”. On concerns about even temporarily taking full control, Sir Mervyn said: “The whole idea of running an 82 per cent owned bank at arm’s length is a nonsense”.

Sir Mervyn slapped down suggestion from government that there might be a pre-election flotation of RBS. “There’s no immediate sign of RBS returning to the private sector, ” he told MPs.

The governor would not detail his plan for splitting RBS, but confirmed he had already discussed it with the chancellor. He also further criticised the influence and access of top bankers over politicians under the Labour government: “I was surprised at the degree of access people at the top of banks [to politicians]”. If regulators were tough on banks, they would go straight to the PM, he suggested, adding that “the climate has changed since then, but the access hasn’t”.

Sir Mervyn expressed concern that the lobbying efforts had watered down a planned limit on the size of banks known as the “leverage ratio”. “Banks have lobbied intensively” and the “driving force” was wanting to maximise the rate of return on equity and therefore their bonuses.

This is a major display of independence from the governor in his last months in office. I suspect it is rather in tune with thinking at the Department for Business.

Follow @faisalislam on Twitter.