The U.K. government should consider breaking up Royal Bank of Scotland Group Plc (RBS) and hiving off its toxic assets into a “bad bank,” lawmakers said in a report that suggests the lender isn’t ready to return to private hands.
“The government should immediately announce a process for considering alternative strategies for the future of RBS, including splitting the bank and putting its bad assets in a separate legal entity,” the Parliamentary Commission on Banking Standards said in its final report published in London. It urged the government to carry out a “detailed analysis” and report by September.
Chancellor of the Exchequer George Osborne has said he doesn’t favor breaking up RBS, which is 81 percent owned by the government, partly because a full nationalization costing billions of pounds of public money would be required. Osborne will set out his plans for RBS and Lloyds Banking Group Plc (LLOY), which is 39 percent state-owned, in his speech at London’s Mansion House tomorrow.
RBS, based in Edinburgh, was bailed out during the global financial crisis in 2008 and 2009 in a 45.5 billion-pound ($71 billion) rescue, the costliest ever for the banking industry.
The timetable for privatizing the bank was thrown into question last week when Chief Executive Officer Stephen Hester said he plans to quit before the end of the year at the request of the board, instead of presiding over the exit from state ownership as he had hoped. No successor has been named.
RBS’s “capital position remains weak, impairing its ability to provide the levels of lending or competition needed for the restoration of vitality to the banking sector and for the U.K.’s full economic recovery,” the commission said. The bank also “continues to be weighed down by uncertainty over legacy bad assets and by having the government as its main shareholder.”
The commission said the case for restructuring Lloyds, Britain’s biggest mortgage lender, was weaker.
Lloyds “has suffered far less from the effect of public ownership and the perception of political interference than RBS,” the lawmakers said. “Lloyds appears better placed to return to the private sector without additional restructuring.”
RBS closed today at 323 pence a share, below the 407 pence where the government says taxpayers break even. Lloyds closed at 62.18 pence, just above the 61-pence-per-share cost of the state bailout. Osborne has vowed taxpayers will recoup their investment in the two banks, which required 65.8 billion pounds of public money to keep them afloat.
Bank of England Governor Mervyn King, who steps down at the end of the month, urged in March that RBS be split into a good bank that could fund itself and a bad bank containing unprofitable assets, with the government taking the loss. Osborne has said he isn’t persuaded, and wants to transform the bank into an institution focused on increasing credit to U.K. companies and households.
Splitting RBS could lead to “significant advantages” by “focusing the good bank on U.K. retail and commercial banking and, by freeing it from legacy problems, strengthening its ability to lend,” said the commission. A split would make RBS “a more attractive investment proposition which could subsequently be privatized at a good price,” it said.
The commission also said the government should consider whether a split would lead to a quicker privatization of the good bank, examine which assets would go into the good and bad banks and evaluate costs to the taxpayer accordingly.
“If the operational and legal obstacles to a good bank/bad bank split are insuperable, the government should tell Parliament why and submit its analysis to scrutiny,” the report said. “The government should also examine and report to Parliament on the scope for disposing of any RBS good bank as multiple entities rather than one large bank, to support the emergence of a more diverse and competitive retail banking market.”
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