Is bailing out RBS/Lloyds Bank justifiable on a public interest perspective

Is bailing out RBS/Lloyds Bank justifiable on a public interest perspective

The UK banking system was once reputed as delivering excellent corporate governance regime with proper supervision by both the FSA and BOE playing vital roles.

 

The Guardian: http://www.guardian.co.uk/business/2009/jan/19/bank-bailout-guide offered an explanation that revealed far reaching consequences for bank customers, employees, shareholders, taxpayers, the Government and the financial sector. The article noted the root of the crisis as the irresponsible bank culture of taking high risks, short term result-disproportionate bonus culture and lax control. On reflection, I can identify the various failures highlighted on the weaknesses in the way in which the FSA and BOE has been supervising the banking industry. I would have thought that the collapse of Bearings and Enron/Worldcom which raised a number of Internal Control and Corporate Governance issues in the 1990s would have highlighted these issues. Instead, we have the press over the last week revealing the 3^rd bail out of banks. It was claimed that the bail out was necessary in public interest to encourage lending to both homeowners and also, businesses. The rescue now would see the government owning 84 per cent owned by the state.

 

Telegraph : http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/6496295/Bank-bail-out-every-family-shouldering-4350-tax-liability.html measured the impact of the “Bank bail-out: on every family which is anticipated to be  shouldering £4,350 tax liability from the £74 billion bail committed in total since last year. The Conservatives are right to point out the massive outlay by the government, but the real issue I believe is whether all this unimaginable sums is actually in the best interest of the public. Reviewing various press releases acknowledged mounting government debts, bail out leading to nationalisation of the banks leading to greater inefficiency and anti competition practices and a planned tax increase on the public to fund the significant risk exposure have all question the logic of the bail out in public perspective. The article, expresses Gordon Brown’s desire to recoup the full investment, Conservatives addressing their political agenda but very little concrete discussion have been made on the issue of public interest.

 

BBC : http://news.bbc.co.uk/1/hi/business/8347629.stm shared “Treasury seeks RBS lending proof” noted the claim by RBS that they have not been able to meet the £16 billion business lending targets due to poor demand for its loans. This claim seems preposterous considering that we are in a climate where most businesses are struggling. I reflected on a reading on the British Chambers of Commerce(BCC) article recently (http://www.britishchambers.org.uk/business-news/banks-lending-more-to-small-businesses-claims-bba.html) on the difficulty of SMEs and businesses as a whole to get much needed loans and confirms my thought on the matter. I believe that the government’s claim that bailed out banks, are doing more to help our businesses and economy is therefore unsubstantiated. The problem is aggravated by an article recently in The Independent : http://www.independent.co.uk/news/business/news/rbs-faces-another-year-of-losses-hester-admits-1816692.html noting, Stephen Hester, the CEO of RBS making no apology about the failure to achieve lending target noting that the banks were taking a more conservative position on lending by targeting only to those who can afford to payback. This might be a prudent stance especially when banks should be attempting to set suitable credit benchmarks but the impression given seemed to defy the government’s own directive of banks to support lending. It would appear to me that it would have been more appropriate at the hindsight, for the government to channel the funds directly through for instance, BusinessLink, rather than allowing banks to allocate resources at their discretion and promote self interest.

 

Moneyweek: http://www.moneyweek.com/news-and-charts/economics/an-extra-39bn-for-rbs-and-lloyds-but-will-it-work-46002.aspx confirms that the bail out package may not be effective since the penalty of state aid, is for the bank to break-up to encourage competition. The value of the stakes of the government is likely to see a further erosion of profitability. Why?  Firstly, the desire of the government and within the EC framework to encourage competition compels RBS to sell some of its more profitable businesses such as its insurance arm, retail operations which are key business, meaning loss of shareholder value and possibly longer period to recoup the investment. An article in Evening Standards (30/10/2009) noted a break-even point of 122p and 50.5p respectively for RBS and Lloyds to recoup paper losses of £6.6billion or 19% of bailout investment.  Although I believe that public interest is justified by increased competition, the fact that tax payers are in essence investors’ of the bank, it does not offer economic justification at all. 

 

In conclusion, the banking crisis has given rise to loss of confidence of the UK public on the government’s handling of bail out. On one hand, bail out had prevented a major collapse of the British economy with far reaching implications on the entire banking system, but on the other hand, I believe that a lot of articles seem to show that the government is not able to hold accountable on the use of public funds and the role of the regulators (FSA/BOE) seems to be confused.