Nationalizing RBS on the Table

Senior government figures are discussing the possibility of buying out private investors in Royal Bank of Scotland and fully nationalizing it amid mounting frustration at banks’ failure to lend to British businesses.

Bank Vault
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Bank Vault

Cabinet ministers are having conversations about whether to spend around £5 billion ($7.77 billion) buying up the 18 percent of the bank the government does not own, although George Osborne, the chancellor, is opposed.

The fact that ministers and officials are considering the proposal, which would mean taxpayers taking full responsibility for the bank’stoxic debts, shows how exasperated they have become at the barriers they believe banks are placing on lending.

Some at the top of government believe the Treasury’s various schemes to free up credit, the latest of which was launched on Wednesday, have not worked, and forcing RBS to lend more is the only way to push the banks into action.

This would mean directing the bank to increase its lending to companies, which would be open to legal challenge by the remaining shareholders. The only way to get round this, say some ministers, is to buy out those shareholders.

One official said: “This is a conversation that takes place all the time.” Another said the calls for full nationalisation had grown after the dire second quarter UK growth figures and the ongoing problems RBS was having with clearing up its balance sheet.

However several people close to RBS said the prospect of full nationalization was unlikely. They also questioned how the government would force the bank to lend more to small businesses without saddling the taxpayer with excessive risks.

The move would be a dramatic reversal of government policy since it first took a stake in the struggling bank in 2008. Ministers have insisted they want the company to continue acting as a commercial entity.

Both the last Labour government and the ruling coalition have said they want to manage RBS in a way that achieves a maximum return on their stake. But as the bank struggles to return to profitability, and with a share sale looking further away than ever, some at the top of government are advocating abandoning that policy and using the bank to boost lending instead.

RBS is expected on Friday to announce pre-tax losses of about £1.5 billion in the first six months of the year, after a swing in the value of its own debt and a provision for paying back customers hit by its recent IT systems collapse. That episode is expected to trigger one of the biggest ever fines – potentially into the tens of millions of pounds – for a systems malfunction, as well as a large compensation bill. The bank is also in the cross-hairs of the Libor rigging scandal and, like other UK lenders, is facing mounting costs for mis-sold loan insurance.

The case for nationalising RBS has been given further weight by concerns over the pace of the bank’s recovery, which has been slower than first expected.

With the bank expecting further losses to come, some are arguing that if the government is going to have to absorb the effects of more bad debt, it should at least enjoy the benefit of being able to manage the bank directly.

The Treasury remains hostile to the idea of full nationalization. The department said: “We are committed to repairing and returning RBS to full health so that it is able to support the UK economy in the future, and the current strategy is working to achieve that. The government’s policy has always been to return RBS to the private sector, but only when it delivers value for money for the taxpayer.”

Full nationalisation would be fraught with risks and complications. Apart from exposing the taxpayer to increased risk, it is also likely to need clearance from the European Union to avoid breaching state aid rules. A further difficulty is that it would make it more difficult to sell the government’s stake, as doing so would require a new flotation and listing on the stock exchange.

RBS has long maintained that it is lending as much as it can to small businesses without taking excessive risks. The bank provided almost half of all new loans to small and medium enterprises last year.