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.

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7 reader comments

  1. Philip Edwards says:

    Faisal,

    I have just finished watching the King and Bailey show at the Westminster Palace of Varieties.

    If you want to know why everybody loathes bankers just watch a rerun of their session. It would be funny if it wasn’t so tragic and millions of lives not ruined.

    Take this: “I was surprised at the degree of access people at the top of banks [to politicians].“

    Now, if I’m not mistaken, a generation ago this country decided to deindustrialise and put all its eggs into the basket of “financial services.” The result was near ruination of two thirds of the nation, concentration of money and decision making in London, creation of a Banks Spiv Ghetto in Canary Wharf and elsewhere on the banks of the Thames, and a deliberate drastic increase in unemployment and poverty. All of this was caused and administered by UK and international banks. The war criminal Blair even went on to work for spiv bankers J.P.Morgan.

    And King and Bailey of the Bank of England were and are “surprised”?………If that is so, what was the purpose of employing them in the first place? To be the Uriah Heeps of Brit capitalism?

    1. Andrew Dundas says:

      Britain has had super-large financial services industries for over 400 years.
      They were the foundation of both our colonial empire and dominant Royal Navy & land Army. And the source of finance that enabled industrialisation too.
      Not any drag on our economy. Quite the reverse!

  2. Liarpoliticians says:

    Mervyn King can split RBS, so long as he take the £50bn toxic crap on HIS pocket and pension, instead of dumping it on taxpayers to pay off someone else’s crimes.

  3. Edward Harkins says:

    ‘Sir Mervyn said: “The whole idea of running an 82 per cent owned bank at arm’s length is a nonsense”.’

    Absolutely faultless logic and bolstered by plain common sense. In fact a bit of the blinding obvious. The real question, therefore, is why now? Why has this outgoing official only now made this declaration?

    It was equally faultless logic, bolstered by common sense, to have concluded at the outset that the UK taxpayer should never have rescued UK banks on the ridiculous terms entered into. (In a populist context, this has been articulated as the fat cats coining in the bonuses, whilst the UK taxpayer endured austerity and the gall of forking out to pay for the rescue). This was plain and obvious from the outset.

    So the real question is indeed, why now, why only now, Sir Mervyn?

  4. Andrew Dundas says:

    What Merve-the-Swerve is advocating is the ‘Northern Rock’ solution.
    Without, as Edward Harkins reminds us, first allowing RBS to become bankrupt. [Q: why so? A: Because RBS had been ‘too big to fail’. ‘NR’ is titchy.]
    The ‘NR’ solution – minus its bargain price – enabled us to buy that bank for peanuts and to sell its branches for £350 millions whilst retaining its highly valuable mortgages for liquidation at pure profit in the future. Not as lucrative as the 3G sale in 2000, but heading that way.
    Because RBS is multiples bigger than ‘NR’, Merve’s revival of Brown’s strategy of making capital windfalls for us is a ‘no-brainer’. Government should separate out the uncertain loans, sell off the RBS shares at convenient intevals and trouser a big profit for us. Unless, that is, it means applauding the Brown strategy?
    I wonder what Osborne’s new tutor, Mark Carney, will tell him to concede?

  5. Martin Green says:

    I’ve been waiting for the separation of the retail and investment elements of British banks since the first analysis of the Banking crisis in 2008. Many of the ‘alternative’ commentators (those who do not follow the govt line) such as Krugman, Wolf, Celente, Keiser etc. have explained that the FIRST thing that should have been done after 2008 was a re-instatement (in the US) and introduction (in UK/EU) of something akin to the Glass-Steaghal Act, revoked several years ago by Clinton, I believe, in response to pressure from Wall St. The rhetoric and spin set against this logical and necessary move has been nothing short of disgraceful and again underlines the continuing power of the banking lobby over the politicians! I am aghast and appalled at the greed, immorality and sheer cynicism of these people. Disillusioned..you bet!

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